Finding The Next Best Growth Stocks

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Bankrate released results of a survey conducted with millennials about their investment choices in July of 2018. It showed 30% of them prefer cash over any other investment. However, when you factor in taxes and inflation, you are probably losing purchasing power by having money in a savings account. That said, millennials should consider the stock market, specifically growth stocks, if they want to get ahead and beat inflation.

A growth stock is a share of a company that is experiencing accelerating sales and revenue. Netflix is an excellent example of a media company that has amassed a large market cap but continues to grow at a steady pace.

growth stocks netflix

source: Statista

However, some large-cap companies like Exxon have a hard time growing because it already commands such a large market share.

When most investors think about growth, small-cap stocks come to mind. However, some of the largest tech companies in the world are experiencing growth at a rapid pace. In 2018, Apple and Amazon.com  became the first two companies to surpass $1 Trillion in market cap.

large cap growth stocksSource: CNBC

That said, as an investor your focus should be on certain fundamentals when scanning and researching to find growth stocks.

Characteristics Of Growth Stocks – Rising EPS

Earnings per share (EPS) is the amount of money earned for each share of stock outstanding. Analysts and investors use this as a metric to see how profitable a company is. It also tells investors how a company performs on a per share basis.

EPS is calculated using the following formula: EPS = (net income – dividends on preferred stock)/outstanding shares.

Companies release EPS numbers every quarter as part of its earnings statement and are summed up at the end of the year. The corresponding four quarters of the previous year are used to compared EPS; also, EPS can be compared year over year.

Facebook is an example of a company that has shown consistent EPS growth over the last few years.

FB eps growth

source: finviz.com

As you can see, EPS growth often leads to a higher stock price, as seen here with Facebook.

FB growth stock

source: finviz.com

Stock analysts make projections on future EPS. Often that projection is compared to what a company reports. Stocks can experience a great deal of volatility if it posts an “EPS Surprise.”

It’s one reason why some companies will issue EPS guidance, a way of keeping investors informed while potentially reducing volatility in its stock price.

hp growth stock example

source: ZDNet.com

When on the hunt for growth stocks, look for names that have experienced at least double-digit EPS growth over the last three to five years.

Characteristics Of Growth Stocks – Increasing Revenue

When a company releases its earnings report, investors pay close attention to its EPS and revenue numbers. Revenues appear on the top line of an income statement. They are the gross amount earned from selling goods or services. Many times you’ll hear the term revenue and sales exchanged for one another because they mean the same thing on an income statement.

Amazon.com has seen its sales rise substantially over the last three to five years.

amzn growth stock sales

source: finviz.com

amzn growth stocks

source: finviz.com

Its stock price has also seen a meteoric rise over the same period.

Like EPS, analysts offer projections on revenue. Some corporations will also give guidance on future income.

Here is a press release from PepsiCo’s 3rd quarter 2018 results.

pepsi growth stocks

source: PepsiCo

The company reported its net revenue growth and organic revenue growth for the quarter.

Now, as with most financial metrics, try to keep it relevant. Sectors vary in size and competition. Make sure you are comparing apples to apples when you are looking at revenue metrics.

The Characteristics of Growth Stocks- Rising Net Income

Net income is a company’s bottom line; it’s the total revenue minus costs, expenses, depreciation, interest, and taxes.

Nvidia Corporation has been one of the fastest growing companies over the last five years. Here is a look at its net income during that period:

net income nada growth stock

source: Y Charts

That said, there are always exceptions. Tesla has been one of the best-performing stocks over the last five years; however, its net income has been consistently dropping.

tala net income growth stocks

source: Y Charts

Stocks don’t always move with fundamentals; sometimes hype or even supply and demand factors play a more significant influence on a stock price. For example, in 2008, for a brief period, Volkswagen became the world’s richest company.

VW growth stocks

source: CNBC

The stock surged by more than 100% after it was announced that Porsche held a significant position in the company. That said, it caused a massive short-squeeze, as traders who were short; were forced to cover, adding to the buying pressure and creating the stock to spike even farther.

In the long-term, a rising net income should lead to a higher stock price. Value investors like Warren Buffett have made a fortune betting on fundamentals and focusing on the big picture.

How To Find The Best Growth Stocks

There are several approaches to finding growth stocks. One method is to focus on a company’s fundamentals. However, in the near-term fundamentals take a back seat to price action.

Stock prices are influenced by many factors that have nothing to do with a company’s fundamentals. For example, a stock can move on a: macro report, rumor, analyst recommendation, tweet from an influencer, comment out of an activist investor or short-seller.

The market is forward-looking. Traders are making decisions on what they believe the future value of a stock will be. Besides, market participants experience shifts in sentiment.

Emotions like fear and greed can largely influence how the market reacts during certain periods. However, savvy investors know to do the opposite when markets reach highly overbought or oversold conditions. As the adage says: “The time to buy is when there’s blood in the streets.”

Besides focusing on fundamentals, you can also find growth sectors. For example, in 2018, the marijuana sector took off, as an influx of cannabis IPO’s opened on the NYSE and NASDAQ.

For example, artificial intelligence is a growing space. Because of AI, demand for processors is set to rise. Companies like AMD and Nvidia have seen its stock price rise in anticipation for the AI boom.

For short-term traders, the story often is a lot more important than the actual fundamentals. But if you’re on the hunt for the next big growth stock, pay attention to the story along with the fundamentals.

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