How to Find Cheap Growth Stocks
Growth stocks traditionally have been a mainstay in a seasoned investor's portfolio because these companies are earning profits faster than their peers. So, does faster revenue growth equal a high stock price? Not necessarily. Cheap growth stocks are out there and not that difficult to find. Read on to learn how to find cheap growth stocks.
- Difficulty:
- Moderate
Instructions
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1
Compare a company's revenue growth to the overall market and to the company's industry peers. If the company is earning revenue at a faster rate than others in the industry, conduct further research. Check the price per share first to determine if the cost of the stock falls within your targeted price range.
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2
Find the PEG ratio, which is calculated by dividing the P/E ratio (price to earnings) by the projected annual growth. PEG ratios are important when looking at growth stocks because it measures the estimated future value of the stock.
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3
Interpret the PEG ratio. If the PEG ratio is below 1, the stock is considered underpriced and cheaper to buy than other growth stocks with a higher PEG ratio. If the PEG ratio is greater than 1, then the stock is considered to be overvalued.
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4
Evaluate the growth stock. Once you have both the PEG ratio and the price per share, make a list of the growth stocks with a low PEG ratio and a low price. If the PEG ratio is less than 1 and the price per share is within your budget, you have found a potential good investment.
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1
Tips & Warnings
Visit websites such as Yahoo! Finance and The Motley Fool to find company PEG ratios, projected annual growth and price per share numbers.
Low PEG ratios and low price-per-share amounts do not necessarily mean the stock is a good buy. Other mitigating circumstances causing the PEG ratio to be low, such as downsizing or poor executive management, could exist. Look further into a company's history before investing.
