Growth investing focuses on companies expanding faster than the overall market. While value investors look for bargains, growth investors seek companies with exceptional revenue and earnings growth, betting that strong fundamentals will drive stock prices higher. Growth stock screens help you identify these high-potential companies systematically.
What Makes a Growth Stock?
Growth stocks are shares of companies growing revenues, earnings, or both at rates significantly above average. These companies often reinvest profits back into the business rather than paying dividends, focusing on expansion and market share gains.
Growth investor mindset: Growth investors pay more for faster growth, expecting that accelerating earnings will justify premium valuations. The key is finding growth that exceeds market expectations.
Essential Growth Metrics for Screening
1. Revenue Growth Rate
Revenue growth is the foundation of growth investing. Companies cannot grow earnings sustainably without growing sales. Screen for:
- Year-over-year revenue growth: Above 15-20% for solid growth
- Quarter-over-quarter acceleration: Growth rate increasing each quarter
- Multi-year track record: Consistent growth over 3-5 years
Revenue Growth Thresholds
- Moderate growth: 10-15% annually
- Strong growth: 15-25% annually
- Hypergrowth: Above 25% annually
Higher growth rates are more common in smaller companies and technology sectors.
2. Earnings Per Share (EPS) Growth
EPS growth shows whether revenue growth translates to profit growth. The best growth stocks show EPS growing at least as fast as revenue, indicating improving margins.
3. PEG Ratio (Price/Earnings to Growth)
The PEG ratio helps determine if a growth stock's valuation is reasonable relative to its growth rate. A PEG below 1.0 suggests the stock may be undervalued for its growth rate.
PEG Calculation Example
Stock with P/E of 30 and EPS growth of 40%:
- PEG = 30 / 40 = 0.75
A PEG below 1.0 indicates reasonable valuation for the growth rate.
4. Operating Margin Expansion
Growing companies that also improve margins demonstrate operational leverage. As revenue grows, costs do not grow proportionally, leading to accelerating profits.
5. Return on Invested Capital (ROIC)
High ROIC indicates a company generates strong returns from its investments. Growth companies with high ROIC can compound value faster than those with low returns on capital.
Popular Growth Screening Strategies
CANSLIM Screen
Developed by William O'Neil, CANSLIM combines growth fundamentals with technical analysis:
- C - Current Earnings: EPS up 25%+ vs same quarter last year
- A - Annual Earnings: 25%+ growth for past 5 years
- N - New Products/Management: Catalyst for growth (qualitative)
- S - Supply/Demand: Strong volume on up days
- L - Leader: Relative strength rank in top 15%
- I - Institutional Sponsorship: Increasing fund ownership
- M - Market Direction: Overall market in uptrend
Simplified CANSLIM Screen
- Quarterly EPS growth: Above 25%
- Annual EPS growth (5-year): Above 20%
- Revenue growth: Above 20%
- Relative strength rank: Top 20%
- Volume trend: Above average
- Price above 50-day and 200-day MA
Accelerating Growth Screen
Finding companies where growth is accelerating:
- Current quarter EPS growth higher than previous quarter
- Current quarter revenue growth higher than previous quarter
- Positive earnings surprise last 2 quarters
- Analyst estimates revised upward
Quality Growth Screen
Growth combined with financial strength:
- Revenue growth above 15%
- EPS growth above 20%
- Gross margin above 40%
- Operating margin expanding
- Debt-to-equity below 0.5
- Free cash flow positive
Growth at a Reasonable Price (GARP)
GARP investing, popularized by Peter Lynch, seeks growth stocks that are not overvalued. This approach combines growth and value metrics:
- EPS growth rate: 15-30% (not too high to be sustainable)
- PEG ratio: Below 1.0
- P/E ratio: Below the growth rate
- Consistent earnings history
- Manageable debt levels
Sector Considerations for Growth Screening
Growth rates vary significantly by sector. Adjust your expectations accordingly:
Technology and Software
- Higher growth rates expected (25%+ common)
- Focus on recurring revenue and customer metrics
- Accept higher valuations for proven scalability
Healthcare and Biotech
- Revenue may be lumpy due to drug approvals
- Focus on pipeline potential alongside current growth
- Consider future catalysts
Consumer Discretionary
- Moderate growth rates (15-20%)
- Same-store sales growth is important
- Brand strength matters
Warning Signs in Growth Stocks
Not all growth is sustainable. Watch for these red flags:
- Slowing growth rates: Decelerating revenue or earnings growth
- Margin compression: Revenue growing but profits not keeping pace
- Customer concentration: Too much revenue from few customers
- Excessive stock compensation: Diluting shareholders to fund growth
- Negative cash flow: Growing revenue but burning cash
- Missed guidance: Consistently falling short of projections
Managing Growth Stock Positions
Growth stocks require active monitoring:
- Track quarterly earnings: Growth stocks live and die by earnings reports
- Monitor growth trajectory: Exit if growth meaningfully decelerates
- Consider taking partial profits: Lock in gains after large moves
- Stay informed on competition: New competitors can disrupt growth stories
- Rebalance regularly: Growth winners can become oversized positions
Track Your Growth Portfolio
Pro Trader Dashboard helps you monitor your growth stock investments and track key metrics over time. See which growth screens produce your best returns.
Summary
Growth stock screens help you systematically find companies with exceptional revenue and earnings growth. By filtering for strong growth rates, reasonable valuations (PEG ratio), and quality metrics, you can identify potential winners before they become household names. Remember that growth investing requires monitoring for deceleration and being willing to sell when the growth story changes.
Explore complementary strategies with our guides on momentum stock screens or balance your portfolio with value stock screens.