to Consider Growth
With the economy no longer looking like it’s falling off a cliff, and
the stock market showing signs of life, this may be a good time to
consider edging back into the market.
If you agree, here’s a search you can run on Morningstar’s user-friendly
stock screener to find interesting growth stock candidates.
If you’re not familiar with the terms, screeners are programs available
on some financial sites that enable you to search the entire market for
stocks meeting your particular selection criteria. Growth stocks are
those expected to increase earnings at least 15% annually.
I used Morningstar because it’s free and using it is a snap. Find it
from Morningstar’s home page (www.morningstar.com)
by selecting stocks and then
Stock Screener in the Tools section. I’ll give you the details as I
describe my growth stock screen.
Start by selecting “Aggressive Growth” from the Stock Type dropdown
menu. Morningstar classifies stocks into one of eight categories, such
as high-yield or classic growth depending on its assessment of each
stock’s fundamentals. Aggressive growth stocks, consistently profitable
and rapid growers, usually make the best growth candidates.
You can select stocks based on Morningstar’s grades in three categories:
growth, profitability, and financial health. The grades range from A to
F, where A is best. Morningstar bases the grades on how each stock
compares to other stocks in its business sector.
Since, in these times, financial strength is priority number one, I
required A or B grades in that category.
By definition, a company can’t grow without growing sales. I confined my
list to stocks with a solid track record in that department by requiring
at least 20 percent three-year average annual revenue (sales) growth.
Out of 5,000 or so U.S. stocks, only 156 met the three requirements that
I’ve applied so far.
The more profitable the company, the better your results. Return on
equity, which compares net income to shareholders equity (book value) is
a widely used profitability measure. For ROE, higher is better, and most
companies fall into the 10 to 20 percent ROE range. Specify at least 20
percent ROE, limiting the field to the most profitable firms. Adding
that requirement cut the list of eligible candidates down to only 57
Stock analysts forecast the next five year’s average annual earnings
growth for stocks that they cover. Yes, I know that analysts get it
wrong a lot. Still, forecasting earnings growth is their day job, and
they do the best they can in that department. Require a minimum 20
percent expected five-year average annual earnings growth. Try
increasing your minimum to 30 percent if you only want to see the
hottest stocks. As it was, my 20 percent growth requirement cut the list
of passing candidates down to 18 stocks.
Go With Winners
Contrary to the buy low, sell high mantra, stocks that have already
outperformed the market are your best prospects. Underperforming stocks
will probably continue to disappoint shareholders. Pinpoint
outperforming stocks by requiring returns equal or greater than the S&P
500 Index for the year-to-date, one-month, and three-month timeframes.
Adding those performance requirements cut my list to only six finalists:
China Fire & Security (CFSG), Green Mountain Coffee (GMCR), Health
Grades (HGRD), Starent Networks (STAR), True Religion Apparel (TRLG),
and VistaPrint (VPRT).
As is the case for any stock screen, consider the results to be
candidates worthy of further research, not a buy list. The more you know
about your stocks, the better your results.