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Finding the Best Growth Stocks in 3 Steps

The best growth stocks typically share a few common characteristics. Here are three traits I look for - though one trait is especially important.

Back in the days when cars still contained a ton or more of good, old American steel, engine size was a prime topic among car enthusiasts. And the prevailing wisdom was that bigger was definitely better. Or, as we put it then, “There’s no substitute for cubes!” (We meant cubic inches, in case you’ve made the transition to metric displacement.)

Most growth investors, similarly, have a favorite factor they use to find the best growth stocks.

Here’s a quick guide to a few of them.

Keys to Finding the Best Growth Stocks

Momentum—Growth investors who follow Cabot’s strategy often say that the momentum of the market, up or down, is the single biggest key to success. If markets are in an uptrend, the odds that a given growth stock will succeed are dramatically better. It’s like the difference between trying to paddle upstream against the current or heading downstream with the current at your back.

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The same momentum principle applies to individual stocks, but there’s a bigger range of theories about where in a stock’s advance it should be bought. Personally, I favor stocks that are hitting new highs, while some of my growth colleagues like to look for a little temporary weakness or a period of consolidation as a buy point. Either way, as the market sage says, “The most bullish thing a stock can do is go up.” Stocks or markets, the principle is the same.

Momentum won’t tell you what stock to buy, but it will give you a strong hint about when to be buying and when to be heading for the safety of cash.

Revenue and Earnings Growth—One popular way for investors to find the best growth stocks is to screen for revenue and earnings growth. According to this theory, if a company is bringing in increasing wodges of money, and keeping more of it in profits, it must be a good candidate for growth investing.

That’s the kind of logic that has brought so much attention to a company like Alibaba (BABA), the Chinese online marketplace giant. Alibaba’s revenue popped higher by 44% in 2015, slowed to just 28% two years ago and bounced back by 47% last year. Since one of the most-popular screens used in fishing for growth stocks is 15% revenue growth, Alibaba has the qualifications to be a trophy.
And Alibaba’s earnings are similarly robust, averaging 46% growth over the four latest quarters. Add in after-tax profit margins that have averaged over 36% over the same period, and the strong fundamental picture is complete.

Here’s a weekly chart of BABA stock to show its roaring advance through 2016 and 2017 and how well it has held up (after hitting new highs in January) during the recent market turmoil.

This chart shows why Alibaba (BABA) has been one of the best growth stocks on the market.

Story— Some growth investors are constantly on the prowl for a good story. Story stocks have the ability to engage the imagination and generate excitement, which can be a good thing.

But it can also be a snare for the unwary. That’s why paying attention to your stocks is always recommended.

When I do a screen for stocks for the Cabot Global Stocks Explorer subscribers, I always look for a great chart, stories and numbers. This system has helped my readers grab many winning stocks throughout the years.

To learn more about the advisory which I edit, click here.

Cabot Top Ten Trader also features many momentum stocks that have good charts, stories and numbers and provides the updates on these stocks each week so that you know which ones to buy and which ones have reached their potential and should be sold.

For more details on Cabot Top Ten Trader click here.


This post is updated from its original version in published in 2017.

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.