Growth… possibly the most powerful word on Wall Street. Make no mistake about it, when it comes to the stock market, growth is EVERYTHING.
Traders and analysts are constantly looking for growth. The reason is simple, in order for a company, through its underlying stock to appreciate in value, a company has to continue to grow its profits.
To understand why growth is so important you have to understand how the market prices stocks. Stocks are priced based on not only their past earnings, but also their future expected growth rates. You have to always assume that all available information is already priced into stocks, so stocks should (but are not always) priced reasonably compared to their current and past earnings.
This produces a stock’s valuation. A stock’s value is determined by the current price/earnings, or the P/E ratio. If the market believes a stock is fairly priced with a P/E of 18, then the only way the stocks price can rise is if the earnings rise which will allow for share price to move higher and maintain the same overall valuation.
Stocks with high forecast growth rates tend to trade at higher multiples for that very reason. Even companies that dominate their sectors and have enjoyed big growth in recent years will run out of steam if the market does not believe the company can continue to show strong growth moving forward.
Growth is the key, and here are five stocks that have forecast earnings growth off the charts.