|
This article contains suggested screening parameters for finding
fast growing, but reasonably priced and profitable, growth candidates.
The screen requires 20 percent recent annual revenue growth and at least
18 percent forecast average annual earnings growth. An 8 percent minimum
return on assets requirement assures that passing candidates reported
recent profits.
Quicken gives you the choice of picking a selection for each
search parameter from a dropdown menu, or you can enter custom minimum
and maximum values. As is the case with most screeners, Quicken
ignores any choices that you leave blank. As with all of the screeners described
here, you can limit your search to specific industries.
Here are the suggested settings for each search parameter, the rationale
for the selected values, and suggestions for modifying the settings
to better suit your needs.
Market Capitalization
Specify $150 million minimum market capitalization.
Once below $500 million or so, the lower the market-capitalization,
the higher the risk. I set the minimum at $150 million, but riskaverse
investors should change the setting to $500 million. It’s somewhat
academic, because I only turned up one company below $500 million
when I ran the screen, and that was TTI Team Telecom, which had
a $320 million market cap.
Price to Sales Ratio
Specify a minimum P/S ratio of 2, and a maximum of 9.
P/S ratios below 2 usually signal value-priced stocks, and this is
a growth screen. Supermarket chains and other low-margin businesses
may flunk this requirement because they often sport P/S ratios below 2.
Change the minimum P/S requirement to 1 if you want to see those
stocks. Nothing new showed up in the results when I tried eliminating
the minimum altogether. It’s a good idea to specify some positive number,
say 0.1, for the minimum; otherwise you’ll occasionally turn up
oddball companies with negative P/S ratios.
The 9 P/S maximum is an arbitrary limit I set to preclude overpriced
stocks. Since it is an arbitrary limit, you may want to fiddle with
it to see what turns up if you set it higher or lower.
Revenue Growth
Specify minimum 15 percent 5-year revenue growth, 20 percent
three-year revenue growth, and 20 percent one-year revenue
growth (revenue means the same thing as sales).
I set the five-year growth figure lower to pick up companies
showing recent sales growth acceleration. The 20 percent recent minimums
are aggressive and may eliminate blue-chip medium growers.
Lowering the bar to 15 percent for all three periods added six more
stocks to the 14 turned up by the original revenue growth requirements,
including Home Depot and sunglass maker Oakley.
Analysts Consensus Ratings
Specify 2 maximum.
Consensus ratings in this instance means the average of all analysts’
buy, hold, and sell ratings. Strong buy ratings equate to a consensus
value of 1 and hold ratings (meaning sell) are worth 3. My 2
maximum value equates to a weak buy. The only growth stocks you’ll
find with ratings worse than weak buys are “busted” growth stocks.
Latest Quarter Earnings Surprise
Require a 0 percent minimum surprise.
Setting the requirement to zero eliminates companies that reported
earnings below analysts’ forecasts (negative surprise) in their most
recent quarterly report. Many professionals believe that negative surprises
foretell more negative surprises. You are sure to lose money when
a stock you own reports a negative surprise.
Next Five Years Estimated Earnings Growth
Specify 18 percent minimum.
This setting requires that the analysts consensus five-year average
annual growth forecast must be at least 18 percent. Earnings growth
is what growth investing is all about. The 18 percent minimum may be
too aggressive for your taste, but I wouldn’t reduce it to anything lower
than 14 percent.
Current Ratio
Require a 1.5 minimum current ratio.
The current ratio is the company’s current assets (cash, inventories,
and receivables) divided by its current liabilities. Current ratios below
1 indicate that a company’s short-term debts exceed its assets. The
higher the ratio, the stronger the company’s finances, at least on a shortterm
basis. The 1.5 minimum is arbitrary. You can lower it if you promise
to religiously do the appropriate financial health analysis.
Long-Term Debt/Equity
Specify a 0.5 maximum long-term debt to equity ratio.
The long-term D/E ratio compares the long-term debt to stockholders’
equity (book value). The higher the ratio, the higher the debt.
The 0.5 maximum D/E value screens out firms that are susceptible to
debt-induced failure. But it also eliminates most firms in the financials
sector that typically operate with high debt levels. As the case with current
ratio, you can raise the D/E maximum to 1.5 if you don’t skimp on
the financial health analysis.
Revenue
Require annual revenue of $50 million minimum
$50 million in annual revenues isn't much for a publicly traded
corporation. You’re asking for trouble if you significantly reduce this requirement.
Return on Assets
Specify a minimum 8 percent ROA
ROA measures profitability. The higher the ROA, the better, but
you’ll turn up more candidates by reducing the minimum required ROA.
I wouldn’t go below 5 percent. Increase your minimum ROA requirement
if your screen turns up too many candidates.
Share Price
Require a $5 minimum share price
Share prices below $5 say there’s a lot not to like about the stock,
and that implies more risk than you need.
Percent Institutional Ownership
Specify 30 percent minimum institutional ownership
Mutual funds and other institutional buyers prefer growth
stocks. Lack of institutional ownership probably means these pros don’t
think that they can make money owning the stock.
Results
This screen should turn up 15 or 20 strong growth candidates. If
it doesn’t, modify the parameter values as suggested to increase or decrease
the number of hits. | 
Disclaimer
