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Finding Best Growth Stock Candidates

All else equal (of course it never is), over time, stock prices track earnings per share (EPS). That's why finding growth stocks, that is, stocks that grow EPS while you hold them, is the most popular stock investing strategy.

Here’s how to use the free FINVIZ stock screener to find growth stock candidates. Select Screener on the FINVIZ home page (finviz.com) to get there. FINVIZ uses “filters” to isolate stocks of interest. To start, select “All” on the Filters menu to see all of the available filters. Then use the corresponding dropdown menu to select values for each filter that you use. We'll start by limiting your list to small stocks.

Small, But Not Too Small

Market capitalization (value of all outstanding shares) is the way that most investors define company size. Market-caps range from below $50 million to over $500 billion. Focusing on smaller stocks yields the best results. However, your risk goes through the roof if you get too small.

Use the FINVIZ “Market-Cap” filter and select “Small,” which limits your list to stocks with market-caps from $ 300 million to $2 billion.  

Define Stock Search Universe

Since the U.S. is the strongest economy, use the “Country” filter to select “USA,” which limits your list to U.S.-based stocks.

Your best bets are stocks trading several hundred shares trading daily so that hedge funds and other big players can take positions without driving share prices up. Use the “Average Volume” filter and select “Over 500K,” which requires passing stocks to be trading at least 500,000 shares daily.

Get Growth

If history truly predicted the future, making money in stocks would be simple. All we’d have to do is find the stocks with the strongest historical earnings growth. Alas, we need to know what happens next. For that, analyst forecasts, although far from perfect, are our best resource.

Use these analyst forecast filters and specify “Over 15%” for each: “EPS growth this year,” “EPS growth next year,” and EPS growth next five years.”

Also, use the “Return on Equity” filter and select “positive” to assure that the most recent EPS is a positive number.

Late to the Party?  

Once discovered, everybody piles on and stocks with strong growth prospects get overvalued fast. Check valuation using the PEG ratio, which compares a stock’s price to earnings ratio (P/E) to its forecast annual earnings growth rate. For example, the PEG would be 2 for a stock with a 30 P/E ratio that is expected to grow earnings at a 15% annual rate.

Use the “PEG” filter and select “Under 1,” which I’ve found yields the best results.

Big Players In?

Thanks to the huge trading commissions that they generate, mutual funds and other institutional players have better access to market information than we do. Use the “Institutional Ownership” filter and specify “Over 40%” to limit your list to stocks that the big money likes.

And the Envelope Please

My screen turned up five stocks when I ran it. Here's a link to see what the screen is turning up today.  

Builders FirstSource (BLDR): Manufactures and sells building materials. PEG 0.6, NFY EPS growth 37%, institutions own 94%.  

Hersha Hospitality Trust (HT): Real Estate Investment Trust (REIT) that owns limited service hotels. PEG 0.6, NFY EPS growth 37%, institutions own 98%. 

KB Home (KBH): Builds single-family homes. PEG 0.9, NFY EPS growth 22%, institutions own 89%.  

MeetMe (MEET): Operates social networking websites. PEG 0.3, NFY EPS growth 19%, institutions own 57%.  

Supernus Pharmaceuticals (SUPN): Specialty pharmaceutical maker. PEG 0.7, NFY EPS growth 33%, institutions own 92%.  

As always, consider these five stocks to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 4/17/2017

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