Screening for Stocks With Strong Secular Growth
by John Bajkowski
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
- Conclusion
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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.
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Discussion
I have just finished reading Screening for stocks with Strong Secular Growth. I find it to be very informative and useful in my future investments.
Thanks,
James Parkman
posted 10 months ago by James from Alabama
This is my first Screening for stocks and I find several socks that with which I'm not familiar.I plan to run a tab on these for a period of time to see how good they perform.
Vernon from Arkansas
posted 10 months ago by Vernon from Arkansas
This is getting close in terms of results, to a screen I have used successfully for many years. Some mathematical differences are that I use multiyear averages (instead of year to year), least squares trendline, set a limit on R squared value, set a limit on return on equity, and have fewer limits on sales growth, and set an absolute limit on earnings growth averages, but also put a p/e limit on there too.
Many of the same stocks that show up on this screen also show up on my screen too.
posted 10 months ago by Michael from California
I am unable to replicate the screen from this article is Stock Investor Pro. Can someone help me with what I am doing wrong?
posted 10 months ago by Bob from Texas
I cannot find this screen in the Stock Screens section of AAII website. Should I be able to?
posted 10 months ago by Larry from Michigan
Larry - No, this is not one of the screens that we track on an ongoing basis in AAII Stock Screens. The First Cut column is focused on simple, first-pass screens. -Jean from AAII
posted 10 months ago by Jean from Illinois
After first cut can some one guide what are the next step before we buy and when to sell
posted 10 months ago by Nick` from New Jersey
This is a great earnings and sales growth screen! Since so many stocks passed the screen, it can be improved by adding some some industry-relative value criteria (Price/sales, Price/book, Price/earnings, or Price/cash--or free cash--flow) and then further adding some balance sheet safety factors (like Altman's Z score or Piotroski's F score [a combo or both income and balance sheet factors] and looking for more safety than the median for a given company's industry). Then you have a value/growth company screen that is fabulous!
posted 9 months ago by John from Kansas
I just programmed the screen for my own use and noted that in lines 8-11 you compare EPS-Diluted Continuing quarterly items with non-diluted EPS-Continuing quarterly of the prior year. This is not quite consistent comparisons---like comparing apples with applesauce. Close but not quite the same. Going from 4/13/12 to 5/18/12 seven dropped off the Bajkowski list (NVO,RHT, ITC, QSII, WTR, TEA, and RUE).
Also, following my post above, the trailing twelve month F scores from Piotroski were 7, 6, 6, 4, 7, 7, and 6, respectively. QSII had no computable Z score and the two utilities were characteristically very low for that industry: .67 and .81--predictive of bankruptcy in two years for non-utilities.
posted 9 months ago by John from Kansas
Thank you, Mr. Bajkowski!
This fist-cut screen provoked a lot of further analysis because I have begun to see that Consistency of growth is a valuable attribute, as much or more than the rate of growth. I began trying to find a consitency or secular growth measure in any of the AAII stock screens with out success. Is your screen similar to any of the regularly published screens?
Thanks.
Pete C.
posted 9 months ago by Peter from Florida
