Dear WallStreetZen Member;
A couple weeks back we launched the Zen Ratings for over 4,600 stocks on WallStreetZen.com.
This has led to a flurry of activity to learn more about the Zen Ratings via…
Today we are going to take another step forward with the first of many Saturday emails to further your understanding of the Zen Ratings to enjoy more investment success.
Let’s get started with everyone’s favorite group of stocks; Growth.
When it goes right, it leads to a long period of outperformance. NVDA being the current poster child.
Unfortunately, the landscape is also riddled with growth stocks gone wrong leading to horrifying losses. Here are some of the most notable victims in 2024 alone:
-79.91% 23andMe (ME)
-77.36% iRobot (IRBT)
-69.22% Medifast (MED)
The great fallacy in growth investing is that all you have to do is hitch your wagon to the fastest growing companies and you will make money.
Academic research shows this to be a complete and utter fabrication.
In fact, it has been proven that stocks with the highest projected growth rates actually end up having the worst stock price performance.
I realize on the surface that doesn't quite make sense. So let’s dig deeper on why this is true.
Hot stocks expected to enjoy earnings growth of 30%+ per year will have a period of tremendous price appreciation. This leads to them ultimately being priced for perfection.
Unfortunately time and time again the promise of exceptional growth does not meet up with the reality.
That is because that company's competitors are taking notes. And doing everything in their power to win back market share including scalping top employees from the juggernaut firm.
In time, it is nearly impossible for any company to keep up the torrid growth pace. You may think that slowing down to 20% growth is still pretty impressive…but not if the PE is pumped up in expectation for 30%+.
When news spreads that the growth party is over…the stock price will implode!
So if chasing stocks with the highest growth rates is not the path to success, then what does work?
Consistent growth.
Meaning the ability to grow at a healthy pace for a long period of time as proven out by a string of quality earnings beats with estimates going higher for the future.
This always has been…and always will be the most appealing thing for investors leading to serious share price outperformance.
Gladly the Zen Ratings dials into this through the 21 different measures of Growth in the quant model.
Not just earnings growth, but also broadening out to find gains in revenue, cash flow, profit margins and EBITDA.
The more consistently this happened in the past…and across multiple growth measures…the more likely it continues in the future.
And the more likely you wake up the morning of their next earnings report to find another beat and raise on your hands with shares flying higher.
This behooves every growth oriented investor to make sure that the stocks they own stack up on this vital Growth component of the Zen Rating.
To be clear, step 1 in the process is to find stocks that are A & B rated overall. This means that the full 115 factor analysis of the stock shows they are primed to outperform.
That is what you will find in the top half of the info shared on our quote pages.
Next scroll down to the Component Grades section to see how it stacks up for Growth.
“A” means that it's in the top 5% of all stocks for that category. Truly cream of the crop. Whereas “B” is still pretty impressive as that denotes a stock in the top 20%.
What to Do Next?
Discover the Zen Investor & 16 Top Stocks >
Wishing you a world of investment success!
Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
Editor-in-Chief of WallStreetZen
Want to get in touch? Email us at news@wallstreetzen.com.