How to find smaller companies with higher growth potentials?

by provoko

Use a screener like finviz. Look for companies that have sales q/q 30% or more and gross margin over 40% (ideally over 80%, but new stocks closer to their IPO might have extremely low gross margin, but if they can keep growing their sales and EPS, then gross margin will improve and the stock price will keep rising). FB had phenomenal fundamentals for almost the entire time it’s been trading publicly.

EPS q/q should be positive, but it depends, sometimes high growth means spending a lot in the beginning, but if this is an old stock, years after IPO, then stay way from negative EPS growth, old companies should have 15 to 30% EPS growth Q/Q like ZNGA. If it’s reverse, negative sales and positive EPS and negative ROI like GPRO, you know something is wrong.

Look for market caps over $2 billion and don’t be tempted in buying micro caps (under $300 million).

Lastly institutional ownership below 75%, if it’s already over, it could still be a good stock, but you’re looking for smaller companies that institutions haven’t completely gobbled up yet; same is true for large stocks. Institutional buying is like fuel that keeps stocks going. Likewise, don’t bother with near 100% institutional ownership since those stocks will just get sold off by institutions when the stock goes through bad times, Pandora comes to mind when it was completely owned by institutions.

So yeah, that’s what I wanted to say, if you have a different strategy, please share it thanks.

 

Disclaimer: This content does not necessarily represent the views of IWB.

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