The First Cut: High and Consistent Growth
by John Bajkowski
Growth investors seek hot companies in hot industries. While there are many ways to measure growth, most investors focus on earnings in the belief that the stock price will expand to reflect the value of the underlying earnings. This issues First Cut presents exchange-listed firms that have increased revenue and earnings per share in each of the last five fiscal years.
To guard against any recent trend reversal, the First Cut screen required revenue and earnings over the last 12 months to be greater than or equal to the figure from the latest fiscal year. The screen also required that quarterly earnings and revenue for each of the latest four quarters be higher than the comparable quarter one year prior. Looking forward, the screen required that consensus expected earnings for the current fiscal year be greater than earnings for the last fiscal year. Lastly, all stocks were required to have been publicly traded for at least five years, with positive earnings for each of the last six years.
The 30 stocks with the highest earnings growth rate over the last five years made the First Cut. The listing presents the historical earnings growth rate to examine the overall five-year earnings growth; the price-earnings ratio, based upon the last 12 months of trailing earnings, provides a feel for the expectations priced into these stocks; the market capitalization indicates the size of the firm, with smaller firms having higher growth potential; while the price changes highlight short- and long-term stock performance.
Buying high growth is an aggressive approach, with high risk but high return potential. Investors often pay too much for growth, which can lead to dramatic price declines when earnings momentum falters and growth investors jump ship. Successful growth investors are able to identify companies with sustainable growth that is even better than expected.
AAII Vice President, Senior Financial Analyst