Good Growth Stocks Still Exist

Let's face it; it is a tough time to be a growth-oriented investor. Fortunately, for those of us that have stuck around, the rewards may be great.

Many investors make the mistake of ignoring growth stocks in a bear market. Some like to play it safe and wait for a distinct turn around before coming back to growth companies. In the stock market, being fashionably late to the party doesn't work.

While our current environment is much worse than the typical bear market, it is important to remember that in any environment there are still companies that can grow and even flourish. However, these days you have to hunt a bit harder to find the gems.

A Positive Sign for Growth

Downward earnings estimates are still out numbering upward revisions by about 2:1. Don't be discouraged by this number because it is actually an encouraging sign.

When the year started, the ratio of negative to positive revisions was closer to 8:1. So the silver lining is that upward revisions are gaining on downward revisions. While there are fewer growth opportunities available than in periods of economic expansion, growth investors and analysts are having a much easier time now than a few months ago.

Where do we look? How do we find them? I search for stocks in a two-pronged strategy. One is a logical approach; the other is a practical approach.

The "Obvious" Growth Opportunities

Despite the fact that I put somewhat tongue-in-cheek quotes around the word obvious, there are industries with companies that are much more likely to be growing.

The first is the logical. I look at classic defensive and counter-cyclical sectors, which include healthcare, pharmaceutical, consumer staples, etc. There are opportunities here, don't get me wrong, but this is common practice and many investors acting in sync will quickly squander any value.

Yes, I said value. Even the most aggressive growth investors should still pay attention to value and not overpay for growth possibilities.

The Not-So-Obvious Growth Opportunities

My second approach is a much more pragmatic strategy. If you are like me, numbers and facts cannot be ignored and often trump conventional wisdom. I prefer to screen for earnings growth because you can't argue with the numbers, hence the success of the Zacks Rank.

Also, by screening objectively, you will stumble upon stocks that you may not expect. For example I have found fantastic opportunities in retail companies and other consumer discretionary stocks, which is the last place I expected to find growth.

For example, take a look at the top 11 industries according to the Zacks Rank.

There are also industries that are weakening overall but still have stocks that fall prey to the famous idiom of throwing the baby out with the bath water. When investors ignore, and even blindly sell, stocks in sectors that they feel will suffer, they do may dodge some big losses, but they run the risk of tossing out some gold mines.

One retailer that I have had good luck with is Aeropostale, Inc (ARO - Snapshot Report). It is currently in the Growth Trader portfolio and up nearly 10% as of Friday's close.

Buffalo Wild Wings, Inc. (BWLD - Analyst Report) was also a great pick. As you can see, restaurants are the 11th ranked industry and we booked a solid 14% gain on the chicken wing chain.

I still prefer to avoid financials due to excess political risk, as the rules keep changing and no one knows how it will affect the banks, but many other suffering sectors have great companies.

Take a look at Orion Marine Group (OMGI). The heavy construction industry is ranked 158 out of 217, which is not exactly the place you'd expect to be. However, analysts are projecting earnings growth of 37% for 2009 and 27% for 2010 for the stock that is carrying a Zacks Rank #1.

Be sure to keep in mind that although these stocks may be projected to do well, you may still find yourself swimming up stream. As I mentioned before, some investors may blindly sell industries that are out of favor, hurting the stocks performance.

Stay Positive

As I mentioned before, positive revisions are gaining ground and there plenty of other signs that growth opportunities could start popping up anywhere. The ISM Manufacturing Survey stayed fairly stable after falling dramatically in November. The Phili Fed and retail sales numbers also suggest a slower pace of economic deterioration.

Stay cautious, but not so cautious that you miss out on finding the diamonds in the rough.

Happy hunting,
Bill Wilton
Aggressive Growth Analyst, Zacks.com

Bill runs the Zacks Growth Trader, a service that detects those diamonds in the rough, rare aggressive growth stocks at the very beginning of their spurts. These companies haven't yet been noticed by Wall Street.

That's how it registers gains like +13.7% in 12 days with Buffalo Wild Wings and +13.1% in 10 days with Chemed.