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Dr. Market Edge Says Back to Education Institute

Finding Growth Stocks That Grow
Combine the characteristics of a growth stock with TA to form a one-two punch that's tough to beat.

There are many investment styles used by professional money managers ranging from a go-go momentum approach to a more sedate, value investing methodology. One of the most popular strategies is to identify a class of stocks known as growth stocks. As the name implies, growth stocks are companies which are experiencing accelerating earnings and sales growth on a quarter to quarter basis as well as over an extended period of time. Understand that a company can boost its earnings per share (EPS) results by cutting costs, and occasionally, by divesting money-losing operations. But such tactics can go just so far. Over prolonged periods of time, strong rates of EPS growth start with strong rates of sales growth.

In order to qualify as a growth stock, the company needs to have the following characteristics:

  • The earnings per share (EPS) growth rate for the current quarter is greater than the trailing twelve month EPS growth rate.
  • The trailing twelve month sales per share growth rate (SPS) is greater than the thee-year cumulative average SPS growth rate.
  • The trailing twelve-month EPS growth rate is greater than the trailing twelve month SPS growth rate.
  • The companies effective tax rate is greater than 24%. A low tax rate may signal an attempt to temporarily boost earnings.

Companies with the above fundamental characteristics are on a solid growth path and their stocks can be subjected to considerable appreciation. The problem is that once the momentum stops, if only for one quarter, the stock's price can be severely affected. Therefore, it is important to combine this method of finding prospective buy candidates with technical analysis to increase the odds of a successful trade. Market Edge (www.marketedge.com) screens for stocks on a daily basis that meet the growth stock criteria and also have the following positive technical characteristics.

  • The stock has a Market Edge Long (Buy) Opinion, signaling that the majority of the technical indicators are positive.
  • The Up/Down Volume Ratio is bullish indicating the stock is under accumulation.
  • The average daily volume is greater than 100,000 shares per day, which assures liquidity.
  • The ADXR reading is greater than 20, signaling a strong upward price trend is in place.

By combining technical factors to the overall screening process, an important timing function is added to the selection method. Market Edge's 'Prime Ideas' feature contains those stocks that meet the 'growth stock' criteria and also have the above technical characteristics. In addition, the S&P 'Star Rating" is included in the report. The report is located in the 'Screening Tools' section and is available to Gold and Platinum subscribers. Simply click on Screening Tools. Select Market Edge Prime Ideas and then click on Market Edge Growth Stocks.

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