It is a true statement that if you pick stocks based on key fundamental ratios, it is possible to narrow down on good companies. Investors must never consider any speculative news or takeover talks in their stock picking criteria.
Let us discuss and select a decent set of criteria that can help investors in selecting High Growth stocks with potential of attracting investors, especially thanks to Bullish technical indicators.
Focusing on EPS
A great criteria to identify growth in a stock is Earnings Per Share or EPS. When looking at EPS, remember the adage "The trend is your friend" - always use EPS performance over a period of time rather than a single data point on the chart.
- The Forward EPS Long Term Growth (3-5 years) represents how operating earnings are expected to increase over the next complete business cycle.
Note that if you look for a stock with a very high Forward EPS Long Term Growth, you could end up with a company that looks good for now, but it's growth might not be realistically sustainable.
There is no defined threshold or benchmark 'safe ranges' for this metric, but one should question anything above 30%. The bottom range of 15% should be enough to define a positive growth trend.
- The EPS Growth (Projected Next Year vs. This Year) can be used to determine how quickly the company will grow from this year to the next. A value greater than 15% is a good growth rate to look for.
- EPS Growth (Projected This Year vs. Last Year)
Like the previous criterion, this indicator can be used to determine how the company have grown so far, coming from the past year. And again, a value greater than 15% is a good growth rate for this indicator.
- Next Year's P/E Estimate
P/E ratio is basically a comparison of the stock price to its earnings per share, and can be defined over a period of time. A stock with high P/E ratios indicates that the market is ready to pay higher amount for each unit of earning.
The Next Year's P/E Estimate indicates analysts' expectation for the next fiscal year. A value of less than or equal to 15 is neither too high (so this stock could be arguably covered by less number of analysts) nor too low.
Running the above criteria, then applying the First Call Consensus recommendations of Buy or Strong Buy (2.5 to 1.0), and finally looking into the technicals for top few stocks, the best three stocks that stand out are as follows.
|Stock||Forward EPS |
|EPS Growth |
|EPS Growth |
|Next Year's P/E Estimate||Technicals|
|ASH||17.15%||21.62%||66.26%||9.4||Bullish MACD on 06/22/2012|
|AAPL||69.21%||15.78%||69.21%||10.8||Symmetrical Continuation Triangle on 06/08/2012 and Bullish MACD on 07/02/2012|
|AOS||25.00%||17.01%||36.21%||14.1||Continuation of Diamond with target range of $53-$54 and Bullish MACD on 06/29/2012.|
Note: I also found Textron (TXT) and Southwest Airlines Co. (LUV) but their technical charts had mixed signals. For example, LUV showed a Double MA CrossOver (50-day, 200-day) on 06/28/2012 and then next day, it showed a bearish double MA Cross Over (21-week, 50-week). Similarly for TXT, the stock price crossed 50-day MA and 21-day MA on 06/29/2012, but then there was a downward momentum on today on 07/02/2012.
Historically, July has been the strongest month of Q3 for the S&P500 although this rally is the weakest compared to the rallies in Q1, Q2 and Q4. When investors try to time their entries based on economic indicators such as the ISM Index or Housing numbers, there is already too much uncertainty. In such cases, trying to time the right stocks could help in at at least initiating good long positions, if technicals don't work.
Investors must remember that market timing or technical trends do not always work, because sometimes inside stories or external factors are not reflected in any of these key ratios, or technical charts for that matter.
A good example of such factors would be JP Morgan's (JPM) announcement of a huge $2 Billion hedging loss (or maybe $9 Billion according to a recent NY Times report).