Overview

The focus is on small cap stocks expected to get big in the long term.

Growth investing uses fundamental analysis; spend time looking at the numbers.

Due to speculation use stop losses to short before/early during corrections.

The following method is aimed for share price growth in a 3-12 month period.

Predefined/custom screening results must be reviewed.

 

Screeners: predefined

For USA exchanges try the following predefined screens:

Yahoo! Finance: Strong Forecasted Growth, Small Cap Growth, Bargain Growth

Morningstar Screens (blue button): Aggressive Growth, Low-Priced Growth Stocks

Nasdaq Sharp Screen: Aggressive Growth, Zacks: Top EPS Growth Stocks

Reuters Screens: Rising Expectations, Lesser Known Stocks,

Accelerating EPS Growth, Screen Index

For TSX try: MSN Money: Our configured screener

For LSX try Digital Look (log in required) & their growth screens

For ASX try: MSN Money: Growth at a reasonable price,

For India try: ICICI Direct: Estimated Earnings Up,

Cheapest Stocks of Large Growing Companies,

Small Cap with high momentum

Also look at institutional ownership links (up).

 

Custom Screening

Custom screeners offer various parameters. Below is a rough guide.

Market cap $150 million - $600 million (USD)

EPS & revenue growth > 14% (current year)

Try to screen for 20% + rises in quarter-by-quarter EPS growth over 5 yr growth.

6 month relative strength > 50, net insider buying > 0

P/E:15- 35, PSR: 3-8, P/B: 3-15, current ROE > 14%, dividend yield 0-6%

Debt to equity ratio < 0.5, institutional ownership > 24%, short interest ratio < 9

Try to screen for recent performance: Eg previous quarter EPS surprise > 0

Screeners: USA, UK, Canada, India & Australia.

 

Review screening results

Look for positive price to cash flow ratios. Compare to stocks in the same sector.

Give preference to the lower P/E ratios in the results.

Before you invest, look at 1, 3, 6 & 12 month charts of your stock of interest.

Online charts: USA, UK, Canada, India & Australia

You want noticeable rises in volume as the stock is up-trending.

If volume is spiking on down trends you should consider why there is selling.

Avoid screening results that are currently falling on the 1 month chart.

 

Growth stock hazards

P/E reality checks: High ratio stocks are either promising or overbought.

USA: S&P 500 PE average, 1987 & 2000 crashes after average passed 22.

Cashflow crisis: Check P/CF & net profit margins to see they are not falling.

Gossip: Avoid stocks tipped by taxi driver/shoe-shine boy/waiter types.

Earnings downgrades: Negative earnings suprises are sell signals.

Insider selling: Some screeners have this data. Insiders know the real deal.

Also look at our insiders links.

 

Some Growth Factors

Innovation: new products/services/operations that threaten competition.

Politics: new government laws/policies/contracts that favour certain stocks.

Industrialisation:stocks involved in growing, developing nations.

Future friendliness: stocks set to exploit discussed areas of future change.

Examples include: Ageing pop, China boom, climate change, stem cell research,

outsourcing, peak oil, biofuel, alternative energy, security & surveillance,

middle east conflict

 

Conclusion

Keep the hazards in mind. Slow & steady growth can fall very quickly.

Check your stocks once a day. End of day data should be fine to work with.

 

Turnaround Growth Investing

 

Overview

The focus is on underperforming stocks expected to hold growth recoveries.

This approach may also be considered contrarian investing.

 

Predefined Screeners

For USA exchanges try: Nasdaq Guru Screen: David Dreman

Reuters: contrarian opportunities, Yahoo! Finance: contrarian

MSN Money: Contrarian Strategy, Institutional Ownership up last month

Morningstar (blue Morningstar Screens button): profitable but unloved

For TSX try MSN Money: Our configured screener

For LSX try Digital Look (log in required) contrarianism screen

For ASX try MSN Money: Turnaround stocks

For India try ICICI Direct: Future Stocks, distressed stocks

 

Custom Screening

Custom screeners offer various parameters. Below is a rough guide.

For USA try Zacks Custom Screener with the following parameters:

Market Cap > 400, Debt/Equity < 0.5, Price to Cash Flow < 7

Current Price as % of 52-week High-Low Range < 0.5

This will not generate many results in bull market conditions.

To get more results increase the P/CF figure.

Only consider stocks where the P/CF is below its sector average.

Screeners: USA, UK, Canada, India & Australia.

 

Review your screening results.

Before you invest, look at charts of your stock of interest (1m, 6m, 1yr, 3yrs).

Online charts: USA, UK, Canada, India & Australia

Look for signs that most sellers have fled the stock from the 6 month chart.

Check volume, if it rises on down trends there are plenty of sellers so don't buy.

Look for double bottoms. Make sure there is a good rise in volume on uptrend.

Do some research on stocks that remain & why it might turnaround.

 

Turnaround considerations & research

Management changes can herald turnaround growth.

Low debt and strong cashflow generally make turnarounds likely.

Strong cashflow can make a stock a takeover target.

Assess the product/service of the stock and its demand in the future.

Make sure the company has been around for a while & has a decent market cap.

Visit the company website/s. Search for news on the stock.

Do not invest if the company has unethical management practices.

 

General market turnaround indicators

These are for USA, but remember USA markets impact other exchanges.

Option buyers are often wrong. Check the CBOE put/call ratio from Schaeffers

If the moving average gets near/above 0.8 a big growth period should follow.

Look at VIX, more undervalued stocks are available when it passes 45: VIX chart.

NYSE stocks above 50 day moving average; rallies are likely when below 30%.

Stocks purchased when the S&P 500 is 20% below its 200-day moving average are -

- likely to be profitable within a month. S&P 500 & 200-day moving average chart.

Check the advance/decline index of your exchange for trend changes.

 

Conclusion

Turnaround investing is a good strategy at the end of bear market conditions.

Solid stocks that have suffered negative media attention should be considered.

Turnaround growth can be very profitable.