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Fast Growing Stocks Best In
Lackluster Economy
Share prices generally track earnings growth expectations for a stock.
Thus, stocks with fast growing earnings usually outperform slower or no
growth stocks, even in a lackluster economy.
Here’s how you can use the free and user-friendly stock screener
provided by FINVIZ.com to find growth stock candidates. If you’re not
familiar with the term, a stock screener allows you to search through
all listed stocks to find those meeting your specific requirements.
Find it from the FINVIZ homepage (finviz.com)
by selecting Screener. FINVIZ calls its selection parameters “filters.”
On the Filters bar, select “All” so that you can see all of the
available filters at the same time. Use the associated dropdown menus to
select the desired filter values. Here’s how I set up the FINVIZ
screener to find growth stock candidates.
Got Growth
Growth candidates should have a solid history of strong sales (revenue)
and earnings growth, along with expectations that those growth rates
will continue. Require “over 25 percent” sales growth, and “over 20
percent” earnings growth over the past five years and “over 20 percent”
(forecast) EPS (earnings) growth over the next five years.
In Favor
The best growth stock candidates are in-favor with most market players.
Stock analysts, for all their faults, still influence investors.
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.
Not Too Cheap
Low trading prices signal that savvy market players are avoiding a
stock, most likely because they see problems ahead. Whether they turn
out to be right or wrong, a low trading price reflects high-risk. For
that reason, many money managers avoid stocks trading below $15 per
share. Follow the pros and specify Price “over $15.“
Valuation
It’s easy to get caught up in the enthusiasm and overpay for a stock.
The price/earnings ratio (share price divided by the last 12-month’s
earnings) is the most popular valuation gauge. However, 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 30” forward P/E.
Follow the Money
Institutional investors such as mutual funds are privy to information
that you and I never see. If these wired-in players aren’t buying a
stock, neither should you. Institutional ownership measures the
percentage of shares held by these savvy players. Require “over 40
percent” Institutional Ownership to assure that your stocks are in favor
with the smart money.
Truly Profitable
There’s more to profitability than earnings. For instance, a firm that
earned $1 million wasn’t really profitable if its shareholders had to
sink $2 million in new capital into the company to turn that profit.
Profitability ratios compare reported net income to measures
representing the shareholders’ stake in the firm. The most widely used
profitability gauge, Return on Equity (ROE) compares 12-months’ net
income to shareholders equity (book value). Most money managers require
minimum 15 percent ROEs, so require return on equity “over 15 percent.”
Cash--No Debt
High-debt firms are a bad idea in this market. Many experts
expect interest rates to rise this year, and rising rates increase
debt-servicing costs, cutting earnings.
The debt/equity ratio, which is total debt divided by shareholders
equity, is a popular debt measure. Zero ratios mean no debt and the
higher the ratio, the higher the debt. Require a debt/equity ratio
“under 0.1,” which limits your list to low-debt stocks.
Requiring low debt doesn't guarantee that a firm has enough cash on hand
to pay its current bills. For that, you need the Quick Ratio, which
compares assets the total of cash in the bank plus accounts receivables,
to short-term (due within one-year) debt. Require a Quick Ratio “over
1,”which means that cash plus receivables must exceed current
liabilities.
Strong Chart
Viable growth candidates are in uptrends, meaning that, despite
day-to-day fluctuations, the share price is moving up over time. You can
determine which way a stock is trending by comparing its current share
price to its moving average (average closing price over a specified
number of days). Uptrending stocks are trading above their moving
averages.
You can use the 50-day moving average to gauge short-term price action,
and the 200-day MA to assess longer trends. Require that stocks must be
trading above both the 50- and 200-day moving averages to qualify.
My screen turned up five stocks: post-secondary educators American
Public Education (ticker symbol APEI) and Capella Education (CPLA),
casual restaurant operator Buffalo Wild Wings (BWLD), pharmacy benefit
manager Catalyst Health Solutions (CHSI), and footwear maker Deckers
Outdoor (DECK). Here's a
link so you can see which stocks the screen would turn up today.
As is the case for the results of any stock screen, consider these
stocks to be research candidates, not a buy list. The more you know
about your stocks, the better your results. |
