Screening for Stocks With Strong Secular Growth
Many growth stocks have performed strongly during the recent uncertain economic times. Investors have been attracted to companies that have been able to improve net income while other firms struggle.
However, the allure of buying into a stock with the potential for a tenfold increase in price must be balanced with the potential for substantial price declines if the company fails to meet the market’s growth expectations. As long as a firm maintains its earnings per share momentum and exceeds the market’s growth expectations, its stock price can be expected to outpace the market. When expectations are high, a small deviation from market expectations in a quarterly earnings announcement can send the price flying in either direction. Over the long run, stock prices are driven by proven company earnings and cash flow, while in the short term, changes in expectation can move stock prices sharply. If you seek out high return potential, then you must be willing to take on additional risk.
In this article
- Two Types of Growth
- Screening for Growth
- Passing Companies
- What It Takes: High and Consistent Growth Screen Criteria
Share this article
Two Types of Growth
Investors seeking out growth stocks like to separate secular growth from cyclical growth. Companies expanding on a secular basis are growing without regard to the overall business economic cycle. In contrast, the fortunes of a cyclical company depend upon the business cycle. Positive cyclical growth occurs as the economy moves from a recession to expansion. Cyclical auto manufacturers such as Ford Motor Co. (F) have shown strong growth in earnings over the last three years as the economy has come out of its deep recession. True growth companies expand throughout the economic cycle.
Growth companies expand at a rate above that of the overall economy. Practically speaking, however, the minimum benchmark for being classified as a growth stock is at least a 10% annual growth rate in earnings per share, with many investors requiring a 20% annual growth rate. To maintain growth rates this high over any extended period, capital spending is required; for this reason, growth stocks tend to retain most of their earnings, paying little or no cash dividends.
To read more, please become an AAII member or CLICK HERE.