Fast Growers Should Outperform
Many analysts are forecasting strong U.S. economic growth for 2013. If
that happens, growth stocks will outperform the overall market. These
are stocks that are growing sales and earnings at least 15% annually
compared to 5% or so for most stocks. All else
equal, share prices typically track earnings, which is why fast growers
usually outperform other stocks.
Stock screeners are programs that you can use to scan the market for
stocks meeting your selection criteria. Around this time last year, I
described how to find growth stock candidates using the free and
user-friendly screener provided by
FINVIZ.com. The six
stocks turned up by that screen averaged a 27% return over the last 12
months compared to the S&P 500’s 16% return. Last week I ran the screen
again, and this time it turned up five growth candidates. Here’s how you
can use FINVIZ to see which the screen turns up today.
Start by selecting
on the FINVIZ homepage (finviz.com). FINVIZ offers more than 60 filters
that you can use to pinpoint stocks meeting your selection criteria. On
the Filters menu, select “All” to display all of the available filters.
Use the associated dropdown menus to select the desired filter values.
The best growth candidates have a strong recent sales (revenue) and
earnings growth track record. Use the “Sales Growth Past Five Years” and
“EPS Growth Past Five Years” filters and specify “Over 15%” for each.
Strong historical growth isn’t enough. For viable growth candidates, the
market must expect the firm to grow sales and earning even faster in
future years (that’s where Apple fell short last week). For that, we
must rely on stock analysts’ forecasts. Use the “EPS Growth Next Five
Years’ filter and specify “Over 20%.” Unfortunately, FINVIZ doesn’t
offer a filter for forecast revenue growth.
Viable growth stock candidates must be “in-favor” with most market
players. Here again, we’ll rely on stock analysts. They issue buy/sell
ratings on the stocks that they cover. FINVIZ compiles them into five
categories: strong buy, buy, hold, sell and strong sell. Obviously, for
stocks to be in-favor, analysts must be advising buying. Use the Analyst
Recommendations filter and specify “Buy or better.”
Don’t Pay Too Much
As growth investors, we often find out about a stock too late and end up
overpaying. The price/earnings ratio (share price divided by the last
12-month’s earnings) is the most widely used valuation gauge. That
number, however, relies on historical earnings numbers that are often
skewed by non-recurring items such as charges incurred when making an
acquisition. Thus, it’s better to use the forward P/E, which uses the
forecast current fiscal year’s earnings instead of the last 12-months.
Use the Forward P/E filter and specify “Under 35.”
Big Players Know More
Let’s face it. Big players such as mutual funds and pension fund 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. Use the
Institutional Ownership filter and specify “over 40%.”
Your growth stock candidates should be profitable. But, 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). Use the Return on Equity
filter and require “over 15%.”
High debt firms are always riskier than those with little or no debt.
The most widely used debt measure is the debt/equity ratio, which is
total debt divided by shareholders equity. Zero ratios mean no debt and
the higher the ratio, the higher the debt. Use the Debt/Equity filter
and specify “under 0.1.”
Uptrending Stock Price
Growth candidates must be in uptrends, meaning that, despite occasional
dips, 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 trending. 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. Passing stocks should be trading
above both moving averages. Use both the 50-Day and 200-Day Simple
Moving average filters and specify “Price above SMA” for each.
Don’t Be a Cheapskate
Cheap stocks get that way because savvy investors see problems ahead.
That’s why many professional money managers avoid stocks trading below
$15. Follow their lead and use the Price filter to specify “Over $15.
My screen listed five stocks: F5 Networks (FFIV), Francisca
Holdings (FRAN), Michael Kors Holdings (KORS), Mercadolibre (MELI), and
Ultra Salon, Cosmetics & Fragrance (ULTA). F5 Networks and Ultra Salon
are repeats from last year’s list. Click
here to see which stock the list turns up today.
Your screen might turn up different stocks when you run it. As always,
consider the stocks turned up by a screen to be research candidates, not
a buy list. The more you know about your stocks, the better your