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The 5 Best Growth Stock Indicators

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Written by Timothy Sykes
Updated 1/30/2024 6 min read

Another solid guest post from a trading challenge student:

Growth stocks are great to trade because they normally move in large percentages like 5% and higher. Then on occasion you see a big change in the share price that can make you a ton of money. Growth stocks should be followed by every trader, especially when they start hitting their occasional peaks. Finding these stocks are fairly easy because you can see them mentioned in many articles, but there are a few other things you can look at to decide.

How To Find A Growth Stock?

Finding a growth stock – a company that’s expected to grow faster than others – isn’t too hard if you know what to look for. Here’s how to do it:

  1. Look at What’s Trending: Pay attention to industries that are growing quickly, like technology or renewable energy. Companies in these areas might grow a lot too.
  2. Check the Company’s Money Health: Look for companies that have been making more money each year. If they’re earning more and keeping good profits, they might be a good pick.
  3. See How Big They Can Get: Find companies that have something special – like a new product – that could help them sell more in the future. If they can grow bigger in their market, their stock might go up.
  4. Think About the Leaders and Culture: Companies with great leaders and a strong work culture can grow well. If they’re always coming up with new ideas and have a clear plan, they might be worth investing in.

Brand New Technology

A lucrative new technology is part of most growth stock stories but not all. You can have a new company in an established but lucrative field that has a minor competitive edge can also be a growth stock. This is not something you can scan for, but a lot of these hot new technologies are covered even before the companies in them are public.

Brand new technologies tend to be unproven, and growth companies spend a lot of money on development and ramping up production. There can be a lot of swings related to operations and sentiment. A new production facility goes online, or one goes down. All these things can have an impact on the stock. This is probably one of the more fun things to research since you can read about brand new gadgets or technologies that used to be science-fiction. Rarely are things interesting from a non-trading perspective. Earnings have their moments, but are not really casual reading.

Insane PE Ratios

You can have a high PE ratio and not be a growth stock. I would put Amazon in this category, when it is making a profit. Amazon is still kind of a growth stock, but it is just too much of a leader to be considered and up and comer.

Most growth stocks that have positive earnings have very high PE ratios, because the expectation is that growth will be growing at a very fast rate and it will catch up. It also makes sense for companies on the cusp of realizing all the gains it has been working toward. A company has worth beyond its earnings. A company with a robust balance sheet has value even if it is only has earnings of $0.01. That would most likely give it a very high PE. You have to balance intrinsic value against the money the company makes.

Then there is the even harder concept of future potential. That has to be priced in, usually it comes in a bit high. As a trader you can jump in when the initial sentiment starts. Growth stories can play out over years so you just have to trade them like normal. However, there are times when the story has some cracks.

Growth Story is not so Strong

Growth stories will hit a speed bump. If insane growth continued nonstop there would be an endless slew of bigger and bigger companies, and everyone would be rich or rather they would have large bank accounts if they invested. Growth stories eventually fizzle and since the market tends to swing like a pendulum the end of perceived growth can have a significant downward impact on the stock. You can see an example of this with VMWare.

Some growth stories end with events like the dot com bubble or the financial crisis, but others just peter out. VMWare just said that growth was slowing for a year and it was hit with an almost 30% decline most of it taking place in a day then slowly drifting for the next few months. Opportunities abound in growth stocks, and they tend to be more volatile even when they are in a holding pattern.

Usefulness of the PEG Ratio

The PEG Ratio, or the price to earnings growth ratio, gives you a picture of the current price in light of the estimated growth of the company. The estimates really throw a kink into the works. The estimates are usually for five years, but there are other measures. However, since they amount to guesses they need to be taken with a grain of salt.

The PEG is championed by some and there are many quantitative studies to both prove and disprove its usefulness. In reality it is one of the things that can be looked at for a final push. A growth stock is all about growth. A high PE might not matter if the company is expected to grow and a high PE and a low PEG ratio can mean that a company is undervalued relative to its growth. Even if they are estimates people can be looking at the ratio. It is just one more thing in the bag of tricks that traders can use. A large divergence in how the market is treating growth versus the estimates can be a guide to future sentiment, especially if the company incrementally delivers.

Revenue Growth over Earnings Growth

Another way to screen for growth stocks is to look for high revenue growth on a YoY or sequential basis. This is probably the least useful, because it can create a lot of false positives. However, it does highlight how early stage companies are all about revenue and not necessarily profit. There are a lot of reasons for this. Building market share can be one of the most important. Economy of scale takes a certain level of production to reach and the company might be headed toward this, but until then profits will remain under pressure. Revenue is what most growth stocks focus on.

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Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”