When the market has been up for a couple of years, things generally get pretty choppy and sloppy for a number of months, which obviously makes it hard to make money if you’re trying to play things for the intermediate to longer term. But it also makes it more challenging to really find the growth stocks that fit my investing strategy—which, in a nutshell, is to find the fastest growing stocks with big upside potential that big institutional investors are accumulating.
In fact, going back to when I joined Cabot in 1999, we all used to sit down every six to nine months for a post-op review of all our trades, not just to dissect how we did and where we could improve, but also to test out and track a handful of growth stock picking criteria to see which ones really helped us and which were just OK. (I do something similar these days, but on my own and a bit more informally; I usually write a Lessons Learned article in Cabot Growth Investor near year’s end covering a few new Dos and Don’ts I picked up.)
Anyway, I remember a couple of things from those older studies on growth investing. One was that stocks that already had six months (or more) of positive relative performance (RP) vs the market at the time of our buy did better than those that had “only” three to six months of positive RP. Just a heads up when it comes to everyone who’s so eager to buy cheap names—ones that have been uptrending longer tend to do better.
But that’s not the point I wanted to get to, which revolved around what turned out to be our top, most worthwhile growth stock picking criteria over the many years (even before I started there)—triple-digit sales growth at least in the latest quarter, if not for a few quarters beforehand. And that brings me back to my initial thought: Today, with the market trying to emerge from a bear phase, it’s time to screen for these types of names—you don’t have to settle for stuff like you would in, say, late 2021, but instead, look for the cream of the crop.
To be fair, these days, triple-digit growth is hard to find, at least among growth stocks that have any liquidity or halfway decent chart patterns. But I still screen for rapid sales growth (and sales growth projections; I prefer 30% or more, the higher the better) to keep up on names that could emerge as leaders should this rally morph into the Real McCoy. Here are three of the fastest-growing stocks out there to keep an eye on—I think at least one or two could morph into fresh leadership.
Growth Stock #1: Duolingo (DUOL)
The first is Duolingo (DUOL), which I mentioned briefly in my last Wealth Daily—the company is the new leader in language software, with a unique offering that’s game-like and keeps people coming back for more; it has many free users (ad-supported) but most money comes from converting a portion of them to paid subscribers. Of course, the product works, too, with its English test accepted by 3,700 institutions, and as standardized tests go online, Duolingo should flourish. All in all, revenues growth has been 51%, 47% and 50% the past three quarters, and there should be plenty more where that came from. Like many names, DUOL is still battling with resistance in a long bottoming area.
Growth Stock #2: CrowdStrike (CRWD)
The second growth investing idea is CrowdStrike (CRWD), which I have long believed has emerging blue chip written all over it—the company’s Falcon platform has moved beyond endpoint protection (all devices connected to a network) to include some newer technologies (cloud workloads, log protection, extended detection and response, etc.) that are catching on fast. As the firm grows bigger, growth is slowing down, but not much—heck, even at an annual revenue run rate of nearly $2 billion, sales were up a huge 61% in the April quarter, with analysts seeing 52% in the current quarter (likely conservative). Shares are still batting with their 200-day line, but earnings are due August 30—I’d be interested if we see a powerful gap up.
Growth Stock #3: Paylocity (PCTY)
Last but not least is a recent Top Pick in Cabot Top Ten Trader: Paylocity (PCTY), which is leading a rebound in the HCM (human capital management software) sector; this company focuses on smaller clients that likely need the most help, not just with things like payroll and employee management but also tax-related offerings, recruiting and expense management. Growth here has been terrific and looks to show no sign of slowing—sales have risen between 32% and 37% the past four quarters, with more coming down the pike. And after a big correction, PCTY bottomed out for three months and gapped on earnings of late. The longer it can hold most of these gains, the better the chance it will stretch higher down the road.
All three of these growth stocks are showing strong business fundamentals and have the potential to become future leaders in the next bull market. To learn more about the best stocks on a week-to-week basis, consider subscribing to Cabot Top Ten Trader today.