When you’re trading or investing in stocks, they are typically split into two general categories: growth stocks and value stocks. Now, if you want to be on the defensive and find value in the stock market, you would focus on value stocks, as the name suggests.
On the other hand, if you want to beat the market, you would focus on growth stocks. When you’re looking for growth stocks, you need to analyze various factors. One of the most important fundamental indicators is the company’s earnings growth rate. That said, check out how you could use the earnings growth rate to potentially find growth stocks.
Growth Stocks: Why Earnings Growth is Important
When you’re looking for growth stocks, the first thing you want to do find a large potential market. If there are a large market and demand for a specific product or service, chances are that company’s stock should increase in value. Moreover, if there’s an innovative product, the stock should see buyers come in and drive prices higher.
The reason being: traders and investors are expecting strong earnings and revenue growth.
Now, earnings growth is a little more important to investors and traders than revenue growth. Earnings growth lets traders know if the company is actually making money, after costs. In other words, a company could have strong revenue growth, but still might be burning through a lot of cash. That’s the last thing you want to see with growth stocks.
Although the earnings growth rate is an important measure, you shouldn’t base your investment or trading decisions solely on that.
If you’re wondering how to find growth stocks, it’s not too difficult to do just that. Let’s look at how you could use a free tool to find potential growth stocks.
How to Find Growth Stocks
The best way to find potential growth stocks is to set up a screener. Check out this screener from Finviz.
For this screener, we’re looking at stocks with a high quarter-over-quarter earnings per share (EPS) growth rate. In other words, we’re looking for EPS growth rates greater than 25%. Moreover, we filter for small-cap stocks with an average daily trading volume of over 1M shares that are optionable.
You could also filter for year-over-year EPS growth as well. For example, in this filter, we’re looking for quarter-over-quarter and year-over-year EPS growth over 30%.
Again, you should not base your trades on just one indicator.
For example, when I’m looking for growth stocks, I use a simple strategy.
If you want to learn how I went from being a broke college student to a millionaire by trading biotech stocks, as well as strong growth stocks, using simple and reliable strategies…you’ll want to check that out here.
Strategy for Trading Growth Stocks
When you’re trading and trying to find growth stocks, you need to have a clear and concise set of rules.
For example, when I’m trading options, one of the factors I look at is growth. Basically, I want to analyze the growth prospects of the company. If it’s earnings base, is the company on the cusp of another big earnings beat? Or, if it’s a speculative company without earnings, I will analyze whether the technology is about to disrupt the market.
Not only that, I’ll look for my favorite insiders and their track record of buying and selling. This “Insider” Indicator is what gives me the initial reaction to dive into the technicals of the trade. If the big funds are buying it, I’m looking to figure out why before everyone else does.
Additionally, I will analyze both historical and future news that the market really hasn’t realized yet or did not price in the news properly. This one pillar of my approach has averaged seven figures over the last 3 years!
Moreover, I’ll focus on my favorite high-probability chart patterns, as well as earnings calls.
Ultimately, I’ll come up with a thesis.
Check out this trade thesis example.
Trade Example for Option on Growth Stocks
I bought 10 CYBR January 2019 $80 Calls at $3.40.
The company is a security company that has been beating earnings expectations quarter after quarter.
Cybersecurity is a strongly growing industry as we have seen “hacks” of almost all of the really large retail companies. Billions of records have been stolen in the last 5 years.
I expect shares to charge up to the $100 mark when the Nasdaq (the tech index) settles down and consolidates to go higher.
The next relevant catalyst for CYBR will be its next earnings call in early November.
In just over one week, I sold those calls for $5.10, that’s a 50% win. The stock caught an upgrade from Morgan Stanley and caused a huge gap up.
That said, if you’re looking to trade growth stocks, you need to focus on a variety of factors. A company’s earnings growth rate is just one of the important elements to consider.
Growth stocks could be suitable for those who could take on some risk. If you’re only looking to maintain a stable portfolio, growth stocks might not be suitable for you. Rather, you might want to consider value stocks. However, if you believe growth stocks are right for you, you need to focus on earnings growth rates, both quarter over quarter, and year over year. In addition to those fundamental indicators, you would want to analyze the companies earnings conference calls.
For the most part, focusing on options for potential growth stocks has worked well for me. I use my I.G.N.I.T.E trading system to find potential options trades. I focus on six elements and plan my execution in an attempt to extract triple-digit returns from the markets.
Kyle Dennis runs Kyle Dennis’ Biotech Breakouts (biotechbreakouts.com). He is an event-based trader, who prefers low-priced and small-cap biotech stocks. Kyle is now using his experience trading biotech stocks and applying it to the options market. With his cutting-edge trading system, he’s looking to generate triple-digit returns.