Despite a sharp pullback this week, we remain in a bull market. When that’s the case, our growth investing experts always get a lot of questions from readers. And aside from queries about individual stocks, the big question is always, “How do you find leading growth stocks?”
The obvious answer is that you take advantage of what Cabot’s analysts spend all of our working hours doing. We look for promising growth stocks, the type that can lead the next leg higher, and we write about them to our subscribers.
But what if you, as an individual investor, are looking to do some of that research on your own?
It would be quite a challenge to convey decades of experience via a single article, but one thing we can do is share some of the common characteristics we screen for when looking for promising opportunities.
[text_ad]
So here goes.
How to Find Leading Growth Stocks
A few obvious choices probably don’t work.
For instance, you probably won’t find great growth stocks by scanning the lists of the day’s biggest gainers. All too often, the stocks making the biggest leaps during the day are low-priced stocks that are rebounding after big losses or penny stocks that are spiking higher on abnormal volume. And even if a stock trades at 10 or higher, a 20% gain (or more) often (but not always) signals a climax in price action.
It’s also difficult to find stocks with big growth potential by watching the parade of fund managers on financial TV shows. Most big fund managers apply a valuation approach to select stocks, so their recommendations focus on undervalued stocks, rather than those with a chance at rapid price appreciation.
And lastly, it’s probably a mistake to look at the stocks that led the last big rally or those that dominate headlines on financial sites. The next growth stock leaders typically don’t come from the ranks of former leaders; rather, they tend to come from the ranks of undiscovered companies with a fresh appeal for investors.
The best way for the individual investor to find great growth stocks is to screen the markets for growth characteristics.
So, what do you screen for?
4 Growth Stock Screening Tips
Your most important screen is for price appreciation. You should set your screening characteristics to show you stocks that have risen 20% or more during the previous month. This will eliminate stocks that are losing value, ones that are trading in a range and ones that are appreciating only gradually.
If you only have one screen, that’s the one you would use. The most bullish thing a stock can do is to go up in price. Price appreciation represents an improving opinion of the stock on the part of the investing community. And by keeping your time period at a month, you will exclude the one-day flash-in-the-pan stocks that are primed for quick reversals (the latest meme stocks and their ilk, for instance).
I would also look for stocks that trade with adequate trading volume to ensure that you can buy and sell easily. Your liquidity screen should exclude stocks that trade fewer than 300,000 shares a day.
Once your list becomes manageable, you can begin to look for the fundamentals that support price appreciation. These supporting numbers include revenue and earnings growth (both quarterly and over the years), institutional sponsorship and after-tax profit margins.
Finally, you will want to begin researching the business propositions of the companies you have selected. Are their products and services innovative, revolutionary and with potential appeal to a huge mass market? Are they the best in their industry? Is management seasoned, responsive and able to juggle the rise and fall of costs, demand and competition?
You need to consider everything before you put your money down. But the place to start is stock price appreciation. The market is constantly processing all of the information we’ve written about here, and the movement of a stock’s price is like a running tabulation of the results. Start with stocks that are going up, and you’re starting off on the right foot.
If you need help finding the market’s leading growth stocks, consider picking up a subscription to Cabot Top Ten Trader, where Mike Cintolo highlights 10 of the market’s strongest-looking stocks every single week.
[author_ad]
*This post has been updated from an original version.
