The top 4 clues for hunting tomorrow’s growth stars

Tuesday, Jan 24 2012 by
26
The top 4 clues for hunting tomorrows growth stars

For many investors, the task of scouring the market for companies that look poised for rapid growth is the holy grail of stock selection. The stocks chosen by growth investors boast an air of anticipation as finding a long term winner can transform the value of the smart investor’s portfolio. But how do you capture a potential ‘tenbagger’ before it gets away from you?

Growth investing has inspired acres of research and writing and elevated a handful of successful investors to near-celebrity status for their screening strategies. Dig deep and you’ll find there are some common themes that lie at the heart of growth stock selection. We highlight the top 4 common themes here.

1. Fast and Persistent Earnings Growth

Studying a company’s historic and projected profitability is a central plank in every growth investing strategy because without earnings it is near impossible to assess or benchmark the growth potential of a stock.

Back in the 1930s, US asset manager T. Rowe Price (known as the father of growth investing) put earnings front and centre of his buying strategy and stipulated long term earnings per share (EPS) growth as a buying requirement, together with forecasts that EPS will continue to grow ahead of inflation. More recently, US investors William O’Neill and Martin Zweig have been among those to adopt the same tactic.

According to O’Neill – whose CANSLIM investing technique and now legendary book “How to Make Money in Stocks” earned wide acclaim in investing circles –winning stocks generally have strong quarterly earnings per share performance prior to their most spectacular price run ups, as well as a history of steady and significant annual earnings. He puts a particular emphasis on the importance of sales growth in his screen and stipulates that sales should be rising by at least 25% year-on-year (or at least accelerating over the last three periods). Considering that O’Neill studied the history of 40 years of the greatest stock market winners these findings are worth noting.

Zweig’s strategy is even more demanding and calls for stocks to pass numerous earnings related criteria. Among them, EPS growth and sales growth should each have grown by at least 20% over the previous four years. And to insulate against more recent wobbles, the EPS should have been accelerating in the most recent quarters.

2. Buy Growth on the Cheap with…

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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

michael john brown 29th Mar '13 1 of 3
1

Would like to see DATES OF WHEN ADDED against srocks listed as being in each Guru's portfolio and a list of Ft sectors relative strengths top to bottom and where they were a month before,ie rising or falling,and the same for all stocks so one can pick top stocks in top sectors

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frogtiper 30th Mar '14 2 of 3

Good!

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Edward Croft 30th Mar '14 3 of 3
1

In reply to post #72083

Hi Michael. The qualification dates are already there on all the guru screens at the right of the table. We'll be adding more sector analysis in future releases, but that's likely a 2015 project.

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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. My goal is to help private investors learn and invest with confidence through the articles, ebooks and other resources we publish on site. I also occasionally bunk off to interview famous investors at expensive restaurants. I studied History at Aberystwyth University, trained as a journalist and covered business news and corporate finance before settling in as one of the first staff members at Stockopedia.  Away from Stockopedia I'm a mountain bike junkie. more »

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