Screening For The Best Growth Stocks

This is perfectly normal and should even be expected. No quantitative screener can outperform all the time and for every time period, so we need to be realistic in terms of expectations. Since the screen is far more concentrated than the benchmark, it's also more volatile.

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Practical Considerations Screen Results

The quantitative screen is just a list of ideas for further research as opposed to a series of recommendations. The research process begins with the screener, it does not end there.

It's also important to understand that the relative performance of growth stocks will necessarily fluctuate over time. Growth stocks have outperformed both value stocks and the market in general in the past decade and particularly more during the recent ups and downs in the market.

Major economic trends and technological innovations are powerful drivers for growth stocks over the long term. In a world in which economic growth is scarce, companies that can continue growing strongly in all kinds of conditions become increasingly valuable. In addition to this, technological disruption is creating unprecedented opportunities for innovation across different areas and economic sectors.

However, nobody should be too surprised to see some kind of reversion to the mean in the short term. After so many years of massive outperformance from growth stocks, it's reasonable to expect some kind of correction or at least a slowdown in the short term.

A major risk factor to consider when investing in growth stocks is valuation. These kinds of companies usually trade at demanding valuation levels and especially now that growth stocks have been doing so well in the past several years.

One way to approach this problem would be including some criteria for valuation in the screening process. However, that can be too short-sighted. The best growth stocks in the market deserve above-average valuation ratios, and the true value of the business depends on the cash flows that the company is going to produce in the long term. Ratios such as price to earnings are generally too limited since current earnings are underestimating the company's long-term earnings generation in many cases.

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Disclosure: I am/we are long DOCU.

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 any ...

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