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How to find a growth stock

You have decided that you want to invest in growth stocks. Now how do you find them; how do you pick a good one?

As background take a look at the Growth stocks article. Usually you want stocks that have increasing earnings and usually that means increasing stock price.


1. Make a list

You can find them various ways. Stock screeners let you pick out the stocks that have increased their share price and sometimes earnings. (One of these is available in CAPS.) Personally I look for stocks that have increased at least 15% in the last 90 days. But choose your own numbers.

You can also look at the stocks in people's CAPS portfolios or at the holdings of mutual funds that specialize in growth stocks. Plus research services like those provided by brokers often have lists of growth stocks. You can also watch new earnings reports.


2. Do your homework

But getting the list of growth stocks is only the first step. Your research needs to sort out the ones likely to grow in the future.

See also the How to research a company article.

High PE/High PEG. The first ones to eliminate are the ones that are already overvalued. A high P/E ratio or high PEG ratio is often used to decide. But suppose a growth stock can justify a PE of 30. How much do earnings need to grow to reduce a very high PE to 30? And how likely is that to happen?

One time gains. You also want to filter out the stocks that benefited from a one time event. They sold an asset or got a major tax refund. Stocks that move in stair step patterns can also be a problem. Is it a one time event? Or is it merely that the stock goes up when it reports earnings?

Good story/strategy. Stocks with a good story to tell are also good. When Apple introduces a new iPhone, it can take years for supplies to catch up with demand. Hence, earnings are expected to grow as the new item becomes available in more areas. But then growth moderates when everyone has one. What then? Does the company have a strategy to continue to grow? Or are they a one trick pony?

Growth market. If the story is consistent with attractive markets where people are investing successfully, that is also a plus. If it's growing in an old mature market, it can be more difficult. It is certainly less sexy.

Market position. You also want to consider competitors? Is this a leader in the industry? A leader in a niche segment? Are they going up against major competitors and likely to be crushed? How will competitors respond?

Competitive advantage. In many cases other aspects need to be considered: raw materials, technology, capacity, distribution, market share, advertizing, patent position, etc, etc.

The bottom line is do your homework. Then take the best risks you can. And good luck!!

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