How to Set Up a Growth Stock Screen, Filter by Filter

Growth for one year is this year’s revenue minus last year’s, divided by last year’s. Over several years the cleaner number is the compound annual growth rate, which asks what steady yearly rate would carry revenue from the starting figure to the ending one.

That’s the first filter. The rest decide whether the growth is worth anything to you and what you’d be paying for it.

Revenue growth over several years

Screen on a multi-year rate. Three to five years is a reasonable window.

One strong quarter can come from a price increase, a pulled-forward order or an easy comparison with a weak quarter a year earlier, and a screen built on quarterly growth fills up with those. A multi-year rate smooths them out. It also filters out companies whose single good year followed a collapse, since a rebound from a low base can produce an impressive percentage without the business ending up any bigger than it was before the collapse started.

If your screener offers both a CAGR field and a simple average of annual rates, use the CAGR. Averages overstate lumpy growth. The CAGR calculator will check any figure that looks odd.

EPS growth and margins

Revenue growth tells you the business is getting bigger. Earnings growth tells you whether shareholders are getting anything from it.

Add a minimum EPS growth rate over the same window. Then add a margin condition: operating margin flat or rising over the period. A company whose revenue grows while its margin shrinks is buying that growth, through discounts, heavy spending or lower-quality customers, and at some point the spending has to stop or the margin has to recover. Gross, operating and net margin explains which line to use.

Watch for negative earnings. Many screeners return blank or meaningless EPS growth when the starting figure was a loss. Check how yours handles it.

Cap what you pay

Growth screens without a valuation limit tend to fill up with the most expensive stocks in the market.

Two common caps work here. The PEG ratio divides the P/E by the growth rate, so it scales the multiple to the growth you’re getting.

For companies with little or no profit, EV/Sales is the fallback, since it works off revenue. Pick one cap and set it loosely at first. Tools compute PEG from different growth figures (trailing, forward, or analyst estimates over several years), so the same stock can show very different PEGs on two screeners. The PEG calculator lets you rebuild it with a growth rate you trust.

Share count

Growth that comes with a rising share count is partly an illusion for the existing holder. Net income can grow while each share’s claim on it barely moves.

Add a filter capping growth in shares outstanding over the same window. Stock-based pay and acquisitions paid in shares are the usual sources. Shares outstanding and dilution covers where to find the count and why diluted and basic figures differ.

Liquidity

Set a minimum average daily volume and a minimum price. Small, fast-growing companies can trade thinly, and a screen that turns up names you can’t buy or sell without moving the price hasn’t saved you any time.

Set these floors early in the filter order. Growth filters run on a smaller, cleaner universe that way, and you won’t spend time reading about a company only to find its shares trade a few thousand times a day. Size the floors to your own orders. The general order of filters is laid out in how to use a stock screener.

Review the results by hand

Each result needs a short check against its own reports.

For each name, pull up the revenue line for every year in the window. Look for a single jump. An acquisition can add a year of growth in one step, and the screener’s CAGR will treat it the same as growth the company earned by selling more to customers, even though a bought business brings its own debt, its own integration risk and a price that was already paid. Check the share count history for the same years. Then read the most recent annual report’s discussion of where growth came from.

What goes wrong

• Using quarterly growth and catching one-off spikes.
• Leaving out a valuation cap.
• Ignoring dilution.
• Trusting a PEG without knowing which growth rate the tool plugged in, because the same stock can look cheap or expensive depending on whether the denominator is last year’s growth or an estimate of the next five.