| When you ask most investors for their preferred | | | | that stocks with lower projected growth rates |
| stocks, you'll seldom hear them share a blue chip | | | | generally outperform. That is true. But we can do |
| name like Johnson & Johnson, Kraft Foods or | | | | a heck of a lot better than that 5.4% return. |
| Wal-Mart. Instead they will tell you about some | | | | The key is to find growth stocks that exceed |
| amazing growth stock that will be the next | | | | expectations no matter the growth rate. Meaning |
| Google, Microsoft or Apple. | | | | that a growth stock that is expected to grow |
| These investors believe that by simply buying | | | | profits by 5% and ends up growing by 7%, will |
| growth stocks with the maximum earnings | | | | do very well. Ditto for a growth stock expected |
| growth potential that they will make money. Sadly | | | | to grow 30% that ends up at 35% actual |
| our research clearly shows this not to be | | | | earnings growth. |
| true…not even close. | | | | I know on the surface it sounds like you need a |
| In this article we will dispel the myth about | | | | crystal ball to predict which companies will beat |
| investing in growth stocks and shine the light on a | | | | their earnings projections. Gladly it's actually much |
| path that has more consistently paved the way | | | | easier than you think because Len Zacks has |
| to profits. | | | | done the hard work for you. |
| Research Says… | | | | In the mid-1970s Len Zacks realized that growth |
| We know that many of you are still shaking your | | | | stocks that had big earnings surprises continued |
| heads in doubt. Certainly we must be joking, right? | | | | to outperform the market over the next several |
| Unfortunately our research details beyond a | | | | months (this is what academics call the Post |
| shadow of a doubt the vast under performance | | | | Earnings Announcement Drift (PEAD)…yes, I |
| of growth stocks over the past decade. | | | | know it sounds more like a medical problem than |
| Stocks with the lowest projected growth rates | | | | a means in which to invest in growth stocks). |
| actually generated the highest return of +5.4% | | | | But Len went a step further. He wanted to find |
| per year. Yes, we know that doesn't sound like | | | | indicators that would show him growth stocks |
| much, but remember the average return of the | | | | more likely to have positive earnings surprises |
| S&P 500 over that stretch was an anemic | | | | BEFORE they happened. If you could do that, |
| -3.3% thanks to two ferocious bear markets. | | | | then the odds of success were firmly stacked in |
| Each level of additional earnings growth came with | | | | your favor. |
| decreasing levels of profits for investors. As we | | | | For the next several years Len worked feverishly |
| look at the most aggressive growth stocks with | | | | to discover these indicators. Gladly for all of us he |
| 30%+ expected earnings growth, we find an | | | | did find 4 leading indicators of future earnings |
| embarrassingly low -9.7% return. This begs an | | | | surprises. Three of these measures are ways of |
| obvious question... | | | | looking at brokerage analyst earnings estimate |
| Why Don't Growth Stocks Pan Out? | | | | revisions. The last being an analysis of past |
| The early investors in growth stocks generally do | | | | earnings surprises. |
| quite well. They take the early risk when almost | | | | Each factor is potent by itself. Blending them |
| no one has heard of the company. As the | | | | together creates an almost unfair advantage for |
| company bangs out earnings surprise after | | | | investors…that advantage is now called the |
| earnings surprise it gains more investor attention | | | | Zacks Rank stock rating system. |
| and a much higher share price. | | | | I know you've probably heard this story countless |
| However, at some point the company will be | | | | times before from us that the Zacks #1 Ranked |
| "priced for perfection". Meaning that the PE gets | | | | buy stocks have a 28% annualized return since |
| too inflated as people are so sure that the good | | | | 1988. |
| times will just keep rolling (think of a mini version | | | | So if you've heard the story, then let me ask you |
| of the late 90s tech bubble). | | | | a more personal question: |
| Unfortunately the exceptional growth stock rarely | | | | Why haven't you used it??? ;-) |
| holds up over time. At some point, as the | | | | Yes, it's true the Zacks Rank is part of our Zacks |
| company tries to expand so rapidly, it will stumble. | | | | Premium subscription service. But we give you a |
| Even if that just means going from a 50% | | | | 30 day free trial to use this resource with |
| growth rate to a 40% growth rate. On the | | | | absolutely no obligation to buy. And beyond the |
| surface 40% still sounds great…but not to the | | | | Zacks Rank for 4400 stocks, you also get our |
| investors who expected 50%+. So of course the | | | | equity research reports, stock screening |
| growth stock will tank. And tank fast. | | | | strategies and even our new mutual fund rank |
| We are sure you've had a few of these growth | | | | covering nearly 19,000 funds. |
| stocks in your portfolio over the years. So we | | | | If you've had great success on your own as an |
| don't have to prompt you how rapidly the losses | | | | investor, then don't bother with this free trial. You |
| add up. That, in a nutshell, is the danger of | | | | are set. However, if you think your portfolio could |
| investing in growth stocks. | | | | do better, then please take me up on this |
| So What Does Work? | | | | invitation to try the Zacks Rank and all our other |
| Indeed you could look at the stats and conclude | | | | resources built to help you outpace the market. |