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New
Growth Stock Finder
Although everything still looks in disarray, within a few weeks, the
government will probably have succeeded in getting the credit markets
functioning again. If that happens, the stock market will begin looking
beyond current conditions to the eventual recovery.
With that in mind, I’m going to describe a new tool that you can use to
find promising growth stock candidates. By “growth stocks,’ I mean
stocks that are expected to grow sales and earnings at least 15 percent
annually, Since, long-term, share prices usually track earnings, these
are usually the best stock price appreciation prospects.
I’ll use Zacks Investment Research’s Custom Stock Screener to find the
growth candidates. Stock screeners are web-based tools that allow you to
search the entire market for stocks meeting your particular selection
requirements. Zacks’ Custom Stock Screener, which is one of the most
powerful free screeners around, is not new. But until recently, the
screener was so difficult to use that I never mentioned it.
Now, Zacks has redesigned its screener to make it user-friendly, and
they’ve mostly succeeded. Zack’s screener is, say, 10 percent more
difficult to use than Google’s extremely simple Stock Screener (www.google.com/finance),
but offers more, and even better, more powerful selection choices.
Select “Screening”
from Zacks homepage (www.zacks.com)
and then
Custom
Stock Screener (Screening Tools) to get to the screener. Once there,
click on a Category to see the search parameter choices available for
that group.
Smaller Is Better
We’ll start with Market-Cap, which is listed in the Company Descriptors
category. Market capitalization, which is how much you’d have to shell
out to buy all of a company’s shares, is the way most analysts measure
company size. Stocks with market-caps below $2 billion are small-caps,
those with market-caps above $10 billion are large-caps, and those
in-between are mid-caps.
Usually, larger companies are safer investments than smaller firms. But,
considering what’s happened to the likes of Bank of America and General
Electric, that hasn’t been the case in this market. Thus, there’s no
point to confining our selections to larger companies. That said, the
very smallest firms are less able to withstand this economy’s ups and
downs, and thus, are risky bets.
Specify a $250 million market-cap (>= 250). Click “Add “ to add that
selection to your screen (parameters without an ‘Add” button are not
available on the free screener). Zacks displays your selected search
criteria near the top and indicates how many stocks meet your screen’s
requirements.
Follow the Money
Institutions are mutual funds, pension plans, and other big investors.
By virtue of the huge trading commissions that they generate,
institutional investors have access to inside information that we’ll
ever see. Thus, if they don’t own a stock, you shouldn’t either.
Institutional ownership is the percentage of a firm’s stock held by
those big players. It runs from 40 percent to 95 percent for in-favor
growth stocks. Specify 40 percent minimum (>=) institutional ownership
(Ownership category).
Analyze the Analysts
Stock analysts publish buy/sell recommendations on the stocks that they
follow. Zacks compiles the analysts’ advice into strong buy (1), buy
(2), hold (3), sell (4), and strong sell (5) categories. It assigns the
value shown in parenthesis to each category. For instance, if all
analysts were at strong sell, the consensus rating would be 5. Since, if
anything, analysts tend to be overoptimistic, it pays to avoid stocks
that they are advising selling. Specify 3 (hold) for the maximum (<=)
Current Average Broker Recommendation (Broker Rating category).
Analysts also publish estimates for long-term (three to five years)
average annual earnings growth. Since we’re looking for growth stocks,
specify 15 for minimum (>=) Long-Term Growth Consensus Estimate (EPS
Growth).
Profitable, But No Debt
In any market, you’ll always do best by sticking with profitable
companies. Return on equity (income vs. book value) is the most widely
used profitability measure. For profitable companies, values typically
range from five percent to 25 percent, where higher is better. Most
money managers that I know require at least 15 percent ROE, so specify a
minimum (>=) 15 Current ROE (Return on Investment).
Considering current conditions, the last thing we need is a high-debt
stock. The debt/equity ratio, which compares long-term debt to book
value, is a good debt measure. A zero D/E signals no debt, and the
higher the ratio the higher the debt. Specify a maximum (<=) 0.1
Debt/Equity Ratio (Liquidity & Coverage).
Magic Sauce
Research done by Zacks and many others has found that changes in analyst
earnings estimates move share prices. Stocks tend to move up after
estimates increase, and vice versa. Further, once earnings estimates
have moved, they tend to move further in the same direction. Thus,
stocks with recent positive earnings estimate changes have better price
appreciation potential than those that don’t. Zacks’ “% Change F1
Estimate (4 weeks)” parameter tracks the last four-weeks percentage
change in current year consensus earnings forecasts. Specify a minimum
(>=) 5 percent change (EPS Estimate Revisions).
Five Stocks Found
My screen turned up five stocks: restaurant operator Buffalo Wild
Wings (ticker BWLD), online post-secondary educator Capella Education
(CPLA), gold miner Randgold Resources (GOLD), wireless technology
developer InterDigital (IDCC), and online trading transaction provider
Mercadolibre (MELI).
Caution: growth stock candidates perform best in an uptrending market.
So, don’t buy them if the market is heading down. Further, consider
stocks turned up by any screen to be research candidates, not a buy
list. The more you know about your stocks, the better your results.
published 3/15/09 |
