Go for growth when evaluating stocks
When all is said and done, over time, stock prices track earnings per share more than any other single factor. Thus, all else equal, your best stocks will be those that grow their per-share earnings the most while you hold them.
How do you find these fast growers? Stock ananalyst earnings forecasts. Sure, analysts get it wrong more than we’d like, but their day job is forecasting earnings and all things considered, they’re your best resource.
Screen for fast growers
So, today, I’m going to describe how to use the finviz stock screener to pinpoint stocks that analysts think have the best earnings growth prospects. Then, we’ll check some sentiment factors to confirm that the overall market agrees with them. If you’re not familiar with the term, stock screeners are programs available on certain stock market websites that allow you to scan the entire market for stocks meeting your selection criteria.
I often rely on the finviz screener in this column because it’s free, user-friendly, and offers a lot of screening parameters, which it calls “filters.” So, here goes.
From the finviz homepage (finviz.com), select “screener” and then “all” on the screen filters bar to see the available filters. For each filter that you want to use, use the adjacent dropdown menu to select the filter value.
Define target universe
Since the U.S. stock market is arguably the hottest these days, start by selecting “USA” on the country filter. Then, because smaller stocks are inherently risky bets, use the market-cap (value of all outstanding shares) filter to limit the field to mid-cap (more than $2 billion) stocks.
Isolate fast growers
Most stocks don’t grow earnings much more than 5% to 10% annually. So, next, we’ll isolate the fast growers, stocks that analysts expect to grow earnings at least 15% annually. Use the “EPS Growth
This Year,” “EPS Growth Next Year,” and “EPS Growth Next Five Years” filters and specify “Over 15%” for each.
Next, verify that recent earnings growth, at least, came from higher sales, not cost cutting. Do that by specifying “greater than 10%’ for “Sales Growth quarter over quarter.” Along those same lines, verify that passing firms are indeed profitable by specifying “positive” for Return on Equity which can only be a positive number it the past 12 months earnings were positive.
Check market sentiment
Specify “Over 40%” for Institutional Ownership, and “over +5%” for Institutional Transactions, to assure that mutual funds and other wired-in players not only hold significant positions, but are still adding to their holdings.
Finally, assure that the overall market agrees with analysts and institutional investors by verifying that passing stocks are generally heading up in price, not down. Do that by requiring “price above simple moving average (SMA)” for both the 50-Day and 200-Day Simple Moving Average filters.
Four hot prospects
My screen turned up four hot growth prospects.
Mobile communications software maker Digital Turbine (ticker symbol APPS), Commercial Real Estate data supplier CoStar Group (CSGP), mattress and bed linens manufacturer Purple Innovation (PRPL), and small business payment processor Square (SQ).
As always, consider the results of this screen to be research candidates, not a buy list. Also, it will take some time for these players’ growth prospects to play out. Consider holding them six months to a year, and maybe even longer. That said, sell on any major setbacks to their growth story.
Harry Domash of
Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/ topic/Harry_ Domash.