In Search Of The Best Growth Stocks

Investing in the best growth stocks can generate superior returns over the long term. On the other hand, growth stocks are also particularly volatile and risky. The key, like usually happens, is separating the fundamentally sound companies from the ones with mediocre fundamentals.

The following paragraphs will be presenting a quantitative screener that is focused on companies with consistently above-average growth rates in sales and earnings, while also producing solid profitability.

Only because a company meets the numerical requirements above, this does not guarantee that it will necessarily outperform the market going forward. However, consistent growth leadership and strong profitability metrics can clearly help a lot in terms of identifying promising growth stocks with attractive potential for returns.

Consistent Growth Leadership And Profitability

The screener excludes companies with a market capitalization value below $250 million in order to guarantee a minimum size for the companies in the portfolio. This requirement has a negative impact on potential returns because many times the most explosive growth opportunities come from small companies. After all, it is relatively easier for a small business to sustain rapid growth rates over long periods of time. However, it makes sense to impose a floor on company size for risk management purposes.

After that, the screener requires companies to consistently outperform the industry in terms of revenue growth. In particular, a company must have revenue growth rates above 50% of companies in the industry over three different time frames: The most recent quarter, a trailing twelve-month period, and the past five years.

Revenue growth over those three-time frames also has to be above zero. This is to avoid companies that are outperforming the industry but still generating negative growth because the industry as a whole is declining.

In addition to this, companies in the screener need to have average growth rates in earnings over the most recent quarter, on a trailing twelve-month period, and in the past five years. The main idea is selecting companies with superior performance in both revenue and earnings over different time frames.

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Disclosure: I am/we are long ANET, FB.

Disclaimer: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with ...

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