Growth Stock Candidates
All else equal (of course it never is), over time, stock
prices track earnings per share (EPS). That's why
finding growth stocks, that is, stocks that grow EPS while you
hold them, is the most popular
stock investing strategy.
Here’s how to use the free FINVIZ stock screener to find
growth stock candidates. Select Screener on
the FINVIZ home page (finviz.com)
to get there. FINVIZ uses “filters” to isolate stocks of interest.
To start, select “All” on the Filters menu to
see all of the available filters. Then use the
corresponding dropdown menu to select values for each filter that you
use. We'll start by limiting your list to small stocks.
Small, But Not Too Small
Market capitalization (value of all outstanding shares) is the way that
most investors define company size. Market-caps range from below $50
million to over $500 billion. Focusing on smaller stocks yields the best
results. However, your risk goes through the roof if you get too small.
Use the FINVIZ “Market-Cap” filter and select “Small,” which limits your
list to stocks with market-caps from $ 300 million to $2 billion.
Stock Search Universe
Since the U.S. is the strongest economy, use the “Country” filter to
select “USA,” which limits your list to U.S.-based stocks.
Your best bets are stocks trading several hundred shares trading daily
so that hedge funds and other big players can take positions without
driving share prices up. Use the “Average Volume” filter and select
“Over 500K,” which requires passing stocks to be trading at least
500,000 shares daily.
If history truly predicted the future, making money in stocks would be
simple. All we’d have to do is find the stocks with the strongest
historical earnings growth. Alas, we need to know what happens next. For
that, analyst forecasts, although far from perfect, are our best
Use these analyst forecast filters and specify “Over 15%” for each: “EPS
growth this year,” “EPS growth next year,” and EPS growth next five
Also, use the “Return on Equity” filter and select “positive” to assure
that the most recent EPS is a positive number.
Once discovered, everybody piles on and stocks with strong growth
prospects get overvalued fast. Check valuation using the PEG ratio,
which compares a stock’s price to earnings ratio (P/E) to its forecast
annual earnings growth rate. For example, the PEG would be 2 for a stock
with a 30 P/E ratio that is expected to grow earnings at a 15% annual
Use the “PEG” filter and select “Under 1,” which I’ve found yields the
Big Players In?
Thanks to the huge trading commissions that they generate, mutual funds
and other institutional players have better access to market information
than we do. Use the “Institutional Ownership” filter and specify “Over
40%” to limit your list to stocks that the big money likes.
My screen turned up five stocks when I ran it. Here's
a link to see what the screen is
turning up today.
Builders FirstSource (BLDR): Manufactures and sells building
materials. PEG 0.6, NFY EPS growth 37%, institutions
Hersha Hospitality Trust (HT): Real Estate Investment Trust
(REIT) that owns limited service hotels. PEG 0.6, NFY
EPS growth 37%, institutions own 98%.
KB Home (KBH): Builds single-family homes. PEG
0.9, NFY EPS growth 22%, institutions own 89%.
MeetMe (MEET): Operates social networking websites.
PEG 0.3, NFY EPS growth 19%, institutions own 57%.
Supernus Pharmaceuticals (SUPN): Specialty pharmaceutical maker.
PEG 0.7, NFY EPS growth 33%, institutions own 92%.
As always, consider these five stocks to be research candidates, not a
buy list. The more you know about your stocks, the better your results.