Stocks highlighted in this article are: Archer Daniels Midland Company (ADM), The Directv Group, Inc. (DTV), Hudson City Bancorp, Inc. (HCBK), Mylan, Inc. (MYL) and Prudential Financial, Inc. (PRU).
So the market is up. And it's about time. Is this the beginning of the rally that doesn't look back? We'll have to just wait and see. But one thing is certain – lots of stocks have been going up. Some deservedly so. Others, not so much.
The saying "a rising tide raises all ships" most definitely applies here. But when the tide goes down, not all stocks will stay afloat. So today I'm screening for growth stocks and not just any kind of growth stocks. Stocks with growth rates that are too low aren't really growth stocks at all and don't perform that well.
But stocks with crazy high growth rates don't test that well either. And in my testing, I've found that very high growth rates perform almost as bad as poor growth rates. A good place to start is to look for growth rates that are aggressive, but also realistic.
Looking at the S&P 500, the average growth rate for the next 12 months is barely positive. But the average 5-Year Historical Growth Rate is roughly 6.5%. So looking for stocks with a doubling of that growth rate for the current year is aggressive, given the current environment, but pretty reasonable in and of itself.
By using the free screener on Zacks.com, you can get started on this right away.
Just by adding in a price filter of >= $5 and a one year projected growth rate of >= 13%, stocks in the S&P 500 were narrowed down from 500 companies to only 61. As for how to make sure their growth rates aren't 'too high'; I like to look at their valuations as well.
One ratio in particular that I like is the PEG ratio. The PEG ratio is interesting when used with growth stocks because it takes into account the growth rate. The calculation is simply: P/E ratio divided by its future growth rate = PEG. Basically, it shows how much you're paying for each unit of growth.
A value of 1 means the P/E is in line with the growth rate. Above 1, the P/E is higher than the growth rate. Below 1, the P/E is lower than the growth rate. And in general, a lower PEG is considered better as it shows value. In other words, it isn't too 'expensive' in comparison to its earnings potential and hasn't been bid up too much. Adding a PEG ratio of
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