How to Screen for Growth Stocks
To screen for growth stocks, filter on several consecutive periods of revenue growth rather than a single one, add a margin condition so growth is not being bought, and apply liquidity floors first. Historical growth is what a screener can see; whether it continues is what it cannot.
A growth screen looks for companies expanding quickly. It is the easiest kind of screen to build and the hardest to use well, because everything it measures is behind you and everything that matters is ahead.
Before you start
A definition of growth — revenue, earnings or both — chosen before the filters are set. They behave differently. Earnings can grow through cost cuts; revenue cannot.
A minimum number of consecutive periods, because one strong quarter is noise. Three years is a pattern; one comparison is a coincidence waiting to be identified.
Liquidity filters set before any growth filter. The most extreme growth rates cluster in very small companies with very small bases.
The steps
1. Set liquidity and size floors first
Minimum average volume and a revenue floor. A company going from a tiny revenue base to a slightly less tiny one produces a spectacular percentage and describes nothing.
2. Filter on revenue growth, not earnings
Earnings growth can come from cost reduction, a tax change or a low base last year. Revenue growth means more was sold, which is the thing the screen is actually looking for.
3. Require consecutive periods
Three or more consecutive years, or twelve consecutive quarters against the prior year. On this site’s shared series direction runs average 2.01 bars and the longest ran 11 — short runs happen constantly by chance.
4. Add a margin condition
Gross margin flat or rising while revenue grows. Falling margin alongside growth means the expansion was purchased with price cuts or spending, which is a different proposition.
5. Check whether growth is funded internally
A company growing on repeated share issues is diluting existing holders to do it. Revenue per share is a more honest measure than revenue when that is happening.
6. Look at the valuation you are paying
Fast growers trade at high multiples because the market already expects continuation. The screen finds growth; the price tells you how much growth is already assumed.
7. Read every surviving name
For each, answer one question: what is driving this, and can it continue at this rate. A screen cannot answer either, and both are the whole decision.
How to tell it worked
Liquidity and revenue floors were applied before any growth filter.
Growth is measured over at least 36 months of consecutive periods.
A margin condition is present, so growth bought with margin is excluded.
And the list is between 15 and 40 names, small enough that every one was read.
What the screen structurally cannot see
Whether the growth continues. Every figure it filters on is historical, and the price of a fast grower is set by an expectation about the future that the screen has no access to.
Whether the base is meaningful. Doubling a very small revenue figure is easier than adding a few percent to a large one, and the percentage presents them as though the first were more impressive.
Growth against momentum
A growth screen filters on the business. Revenue, margin, consecutive periods — facts about what the company sold.
A momentum screen filters on the share price. Recent relative strength, distance from a high, rate of change. Facts about what other buyers have been doing.
They frequently return overlapping lists and they are not the same idea. A company can be growing strongly with a falling share price, and a share price can be rising on a business that is not growing at all. Knowing which one your filters actually encode is the difference between two strategies with very different failure modes.
Where growth actually comes from
Selling more units to more customers is the durable kind. It usually shows as revenue rising with margin flat, and it is the pattern the filters above are built to find.
Raising prices is growth too, and it has a ceiling. Revenue rises, margin often improves, and the question the screen cannot answer is how much further prices can go before customers leave.
Acquisitions produce revenue growth that is real and not organic. The combined company sells more because it is two companies. Whether that created anything depends on what was paid, which sits on the balance sheet as goodwill rather than in any growth filter.
Most screeners cannot separate these three. They see one revenue line going up. Reading the names is how you find out which of the three you are looking at, and it is the reason a growth screen produces candidates rather than conclusions.
The original data
Of the 24,971 unique videos in research/search-study-corpus.jsonl, 105 mention growth stocks in the
title, at a median of 3,816 views across 83 channels, and 43% of those are instruction-shaped. Growth
investing as an approach appears in 121 at 3,816 and value stocks in 9 at 57,529. The counts come from
site/corpus_count.py and site/rank_investing.py.
105 videos at 3,816 against 9 on value stocks at 57,529. More than ten times the coverage and a fifteenth of the audience per video — an extremely crowded subject serving a smaller audience per instance than almost anything else measured here.
The answer to the question on that chart is that three years of that rate is already in the price. The question is not whether it grew but whether it continues — and a growth company that merely slows usually falls, because the multiple was paid for continuation rather than for the current earnings.
When it fails
The failure is a screen that finds last year’s growth and buys this year’s price, and it repeats across a whole list. Every name has genuinely expanded, the filters were applied correctly, and each one trades at a multiple that already assumes the expansion continues. When one of them grows at half the rate — still growth, still a good business — the share price falls sharply, because what was being paid for was the rate rather than the result.
The second failure is one strong period. Short runs occur constantly by chance.
A third is screening on earnings growth. It can come from cost cuts.
A fourth is no margin condition. Growth bought with margin looks identical.
A fifth is ignoring share issuance. Revenue per share tells a different story.
And a sixth is not looking at the multiple. The screen finds growth; the price sets the terms.
Related
Growth investing covers the approach and what it pays for. Growth stock is what the screen is trying to identify. And momentum stock is the neighbouring idea these filters often pick up by accident.
The filter that improved this most was requiring the margin to hold while revenue grew. Without it the screen kept finding companies that had bought their growth — cutting price, spending heavily on acquisition — and the revenue line looked wonderful while the business underneath it got worse.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.