How to find growth stocks like the Naked Trader

Wednesday, May 29 2019 by
29
How to find growth stocks like the Naked Trader

For many investors, the perennial appeal of fast growing stocks is their ability to deliver outsize capital returns. Forget value, forget dividend income… growth in its purest form is all about fast-paced earnings expansion lighting a fire under share prices. It’s about going big or going home. It’s the classic territory of popular traders like Mark Minervini and William O’Neil - and it’s a strategy that’s made them famous.

But there is another way. Growth investing doesn’t always have to be about buying fast moving shares at any price. Over the years, it has evolved a second strand. Once upon a time growth investors paid little attention to valuation. These days, “growth at a reasonable price” (GARP) is, for some, a much more palatable way of doing things.

Balancing growth and value

One of the early advocates for buying growth stocks at reasonable prices was Peter Lynch. The former Fidelity Investments money manager used what he called the price to earnings growth rate - the PEG - to ensure he wasn’t over paying for expected future growth.

The PEG works by taking last year's price-to-earnings ratio and dividing it by the consensus forecast earnings growth for the next year. A PEG of less than 1.0 means you could be buying growth on the cheap. Any more than 1.0 and it could be looking expensive

Lynch used this approach very successfully, and others followed. Today, GARP strategies are some of the best known go-to methods of finding small-cap stocks that could be tomorrow’s growth stars. In most cases, the strategies are multi-faceted: they look for a range of factors that tend to be the fingerprints of successful growth investments.

One of the most popular - and a long-term successful strategy modelled by Stockopedia - is the approach used by Robbie Burns, the Naked Trader.

Robbie is best known for his book, The Naked Trader: How Anyone Can Make Money Trading Shares. In it, he outlines a strategy that uses a range of measures spanning growth, price momentum and value factors and focuses on small and mid-cap stocks. He also uses some non-financial, qualitative rules in his analysis.

Like many GARP strategies, the Naked Trader approach looks for positive sales and earnings growth over the past year - and net debt should be well under control. In terms of momentum, the price of the stock…

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Disclaimer:  

As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>


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3 Comments on this Article show/hide all

herbie47 30th May 1 of 3
7

I'm not sure why you are highligting this screen, it has not performed well over the last year down 10%, other growth screens have outperformed it over 1 and 5 years such as the Jim Slater Zulu screen +10.8% and +118% respectfully.
Yes I agree about Robbie Burns shares, I don't think he has any of those shares in his portfolio, his latest buys are Andrews Sykes (LON:ASY), ITV (LON:ITV), Gamma Communications (LON:GAMA), Synthomer (LON:SYNT), Avon Rubber (LON:AVON), Computacenter (LON:CCC) and Solid State (LON:SOLI). I'm not sure some of those rules apply anymore, I think he is looking for a change in momentum, some of his buys are near their 52 week low.

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ddinksdadd 1st Jun 2 of 3
3

I would agree. Having spent a couple of days with Robbie on his seminars his method does not lend itself easily to a screen approach. Sure his picks have the characteristics of this screen but having watched him 'live' I can report this is just the beginning of his approach. Robbie is a trader, not so much an investor ( I think the clue is in the name!) It doesn't surprise me that some of his recent buys are at 52 week lows as they represent good value on the turn. Robbie famously often appears to play down TA but i'm convinced he pays much more attention to MA and volume than he lets on. Specifically he is very very focused on buying pressure which he deduces using level 2 data, to time his (no doubt very carefully fundamentally calculated ) buys!

A screen will not capture how he works I think except ( and ive asked Stokopedia to do this) except if you include TA based criteria in the screen. Even then it could produce short term buys so the screen really ought to say when the time has come to sell! Note also Robbie sometimes times these buys as a 'top up' to long term conviction holds, so its all in the context!

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Cisk 1st Jun 3 of 3
8

I went on a couple of his courses some years ago, one of the most noticeable things he did (and still does on the blog) is to not be afraid to add to existing positions as the price goes up. I think this is probably where he’s made most of his money, using price momentum to turn a small position into significant gains. Take Ab Dynamics (LON:ABDP), I think he originally bought around £7 and then kept adding as the price rose.

Many people use the reverse and take profits off the table as the price rises - and like to average down on their losers! It’s this single bit of advice that stuck in my mind the most from his sessions.

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