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Fast Growers Should Outperform
With the economy finally showing signs of
life, this might be a good time to consider growth stocks again. These
are stocks that are growing sales and earnings at a faster than normal
clip, typically at least 15% annually. Since share prices typically
track earnings, fast growers usually outperform other stocks.
Two years ago, on January 31, 2010, I
described how you could use the free and user-friendly stock screener
provided by FINVIZ.com to find growth stock candidates (screeners are
programs that you can use to scan the market for stocks meeting your
selection criteria).
My January 2010 screen turned up five
growth candidates that as a group averaged a 15% return over the next
six months compared to the S&P 500’s 1% return. Since growth stocks can
be easily tripped up by a weak economy, I didn’t feel that the time was
right to produce another growth stock portfolio until now. Here’s this
year’s version.
Start by going to the FINVIZ homepage (finviz.com)
and then selecting Screener. FINVIZ calls its selection criteria
“filters.” On the Filters bar, select “All” to display all of the
available filters. Use the associated dropdown menus to select the
desired filter values.
Start With Fast Growth
Growth candidates should have a
solid history of strong sales (revenue) and earnings growth, along with
expectations that those growth rates will continue. Since the past few
years have been tough, require “over 10%” earnings (EPS) and sales
average annual growth over the past five years instead of the 15% or 20%
you might specify in normal times. Looking ahead, require that analysts
must be forecasting “over 20%” average annual EPS growth over the next
five years.
Positive Sentiment
The best growth stock candidates are “in-favor” with most market
players. Stock analysts issue buy/sell ratings on the stocks that they
cover. FINVIZ compiles them into five categories: strong buy, buy, hold,
sell and strong sell. Require Analyst Recommendations of “buy or better”
to limit your list to in favor stocks.
Average volume (number of shares traded
daily) also measures market sentiment. Require over 200,000 (200k)
average volume to assure that passing stocks are in-favor by that
measure.
Don’t Pay Too Much
The biggest pitfall of growth investing is arriving too late at the
party and overpaying for a stock. While many use the price/earnings
ratio (share price divided by the last 12-month’s earnings) to measure
valuation, it’s better to use the forward P/E, which uses the forecast
current fiscal year’s earnings instead of the last 12-months. The
forward ratio excludes non-recurring items that can distort historical
earnings, and hence, the P/E ratio. Require an “under 35” forward P/E.
Follow the Big Players
Thanks to the huge trading commissions that they generate, institutional
investors such as mutual funds have access to information that you and I
never see. Thus, it makes sense to stick with stocks that the big money
likes. Institutional ownership measures the percentage of shares held by
these savvy players. Require “over 40%” Institutional Ownership.
Real Profits
There’s more to profitability than reported earnings. For instance,
earnings of $1 million doesn’t mean much if its shareholders had to sink
$2 million in new capital into the company to turn that profit. Return
on equity (ROE), the most widely used profitability gauge, compares
12-months’ net income to shareholders equity (book value). Require
“over 15%” ROE and higher is better.
Low Debt
Firms loaded down with high debt are always riskier than those with
little or no debt. The debt/equity ratio, which is total debt divided by
shareholders equity, is a good debt measure. Zero ratios mean no debt
and the higher the ratio, the higher the debt. Require a debt/equity
ratio “under 0.2,” and lower is better.
Uptrending Stock Price
Strong growth candidates must be in uptrends, meaning that the share
price is generally moving up. Comparing a stock’s share price to its
moving average (average closing price over a specified number of days)
will tell you which way a stock is moving. Uptrending stocks are trading
above their moving averages, while downtrending stocks are trading
below.
The 50-day moving average gauges short-term
price action, and the 200-day MA measures longer trends. Require that
passing stocks must be trading above both (simple) moving averages
(Price above SMA).
Not Too Cheap
Cheap stocks get that way because many investors see problems ahead.
Whether they are right or wrong, low trading prices signal added risk,
which you don’t need. Require passing stocks to be trading “over $15.”
My screen listed six stocks: Buffalo Wild Wings (BWLD), F5 Networks (FFIV),
Gulfport Energy (GPOR), SolarWinds (SWI), UnderArmour (UA), and Ultra
Salon, Cosmetics & Fragrance (ULTA). Buffalo Wild Wings was the only
repeat from the January 2010 list. Here's a
link to the completed screen. It will
probably turn up different stocks when you run it. Consider these
stocks to be research candidates, not a buy list.
published 1/29/12 |
