By Nancy Zambell
Editor of Investment Digest and Dividend Digest
Growth Stocks for Everyone
7 Growth Stock Catalysts
3 Growth Stocks that Meet My Criteria
As you can see by the following chart from Morningstar.com, growth stocks have been on a tear for the past five years, handily outpacing most other stock categories.
Yet, the term “growth stock” still manages to strike fear in the heart of some investors, particularly folks who equate growth with riskier or more speculative stocks.
I understand why they may think that way, but I’d like to dispel that assumption today.
In the old days of investing, a growth stock was defined as a company whose earnings growth and share price gains would outperform the market averages. You would buy a growing company and sit back and wait until it grew into a blue chip stock.
Then, during the tech boom and bust in the late 1990s, “growth” meant crazy growth—companies with no earnings, but stock prices that soared 40%, 50%, even 100%, seemingly overnight. Well, that story ended badly, many investors lost their shirts, and growth companies lost their allure.
But when the market once again heated up in 2005–2007, investors looking for large gains turned to high-flying financial stocks that rode to stratospheric highs on the coattails of the booming housing industry. As you know, that didn’t turn out so well, either.
Today, investing in growth stocks has once again changed, evolving into what I like to think is a more practical—and attractive—strategy. In essence, growth stocks have been redefined as companies whose earnings growth and share price gains outperform the market averages. That sounds familiar, doesn’t it? Yes, we’ve come full circle.
But the big difference between the “old” and “new” growth stocks is the lack of patience that characterizes investors today. In today’s volatile, 24/7 news marketplace, we don’t have the luxury—or fortitude—to buy a stock and wait years for it to reach our sell price (or turn into a blue chip). Instead, we must determine if there is a catalyst on deck that will boost its earnings and share price in the near-term—not 10 years from now.
I just returned from the World Money Show in Orlando where I taught a workshop on “Special Situations” and covered a few of the catalysts that can propel a company’s stock into new territory. I also just recorded the workshop for the eMoneyShow.
Some of these catalysts include
• Mergers & Acquisitions
• Initial Public Offerings (IPOs)
• Stock Buybacks
• Special Dividends
• Private Equity Buyouts
Now, the way the market works is that prices of shares often begin to climb before these announcements are made—so the question becomes, are there any signals that may precede the rise in prices, so that you can get in early?
I believe there are, and here are a few that have served me well in the past:
• Rise in institutional interest
• Analyst upgrade
• Increase in trading volume
• Sector/industry growth
• Market share leadership
• Build up in large cash positions
• Change in company focus
• Need for cash influx
• New management
I go into much more detail in my workshop, so I encourage you to watch the video when you have the opportunity.
In the meantime, I decided to run a few scans that can often signal new momentum in a stock’s price: Rising institutional interest, new analyst upgrades and significant earnings growth forecasts. I found three companies that hit the mark on all parameters.
Tableau Software (DATA) Business analytics
Analyst action: RBC upgraded to outperform
New institutional positions: 64 for 2,941,962 shares
Increased institutional positions: 143 for 9,918,093 shares
Earnings: Actual: $0.42 vs. $0.11 estimated
Rite-Aid Corporation (RAD) More than 4,500 retail drug stores in 31 states and the District of Columbia
Analyst action: UBS upgraded to buy
New institutional positions: 75 for 41,159,473 shares
Increased institutional positions: 202 for 106,772,794 shares
Earnings: Actual: $0.10 vs. $0.05 estimated
GrubHub (GRUB) Online and mobile platform for restaurant pick-up and delivery orders in the United States
Analyst action: Brean Capital upgraded to buy
New institutional positions: 46 for 9,192,436 shares
Increased institutional positions: 88 for 20,576,526 shares
Earnings: Actual: $0.16 vs. $0.11 estimated
I recommend that you do your own research to determine if these stocks fit into the strategy and goals of your own portfolio before you buy them. And don’t forget: if you do purchase shares, set your stop-losses where you are most comfortable (I suggest 15%–30% below your purchase price).
Editor, Investment Digest and Dividend Digest