The Right Way To Find Growth And Value Stocks

Looking for growth and value in your stock picks is a winning combination. Especially now, since growth rates have been subdued and valuations are getting increasingly higher. And while there are still plenty of them around, it's getting harder to find stocks that fit squarely into both categories.

First off, Growth Investors focus on companies with great earnings growth, which makes sense since earnings drive prices. But nobody wants to overpay for good growth.

Value Investors focus on low valuation metrics, such as low P/Es for example. But many companies have low P/Es because they don't have any real growth. They lack earnings power. People aren't willing to pay up for these stocks because there's nothing to pay up for.

But looking for both growth and value is a great combination and helps alleviate the pitfalls of having one but not the other. But I believe there is a right way and a wrong way to find both growth and value stocks.

What I mean is this:
Most will start off with either one or the other. For example, one might look for stocks with the biggest growth rates first, and then narrow down to those with the smallest P/E ratios.

But if the biggest growth rate stocks all had high P/E ratios (let's say in excess of 20 or more), are you really finding the best of the value stocks? The answer is no.

There’s a similar situation if you screen for the lowest P/E ratios first, and then narrow that list to the ones with the biggest growth rates. If the lowest P/E stocks all had sub-par growth rates, you'd only be selecting the best of the sub-par growth stocks and not really getting both the growth and value you were looking for.

You can also plug in classical metrics like P/E under 20 and growth rates over 20. But you'll have a ton of stocks filling up that list and you'll be digging thru a ton of average stocks, not the best of each category.

So how does one find these stocks the right way? I do it by using a uniform ranking on both categories. And that's the focus of this week's screen. It focuses on companies with the highest growth rates AND the lowest P/E ratios ALL AT THE SAME TIME. Let me explain.

The screen starts off by looking at:
* Companies with one year Projected Growth Rates to be in the top 20 percentile of all companies.
(Using a Uniform Rank of 1-99 (99 being the best growth rates), I screened for stocks ranked 80 or better, meaning better than 80% of all the other companies out their in terms of growth rates.)
* Companies that also happened to have the lowest forward (F1) P/Es – lower than 80% of all other companies.
(Again, using a Uniform Rank of 1-99 (this time 99 having the lowest P/Es), I screened for stocks ranked 80 or better, meaning companies with P/Es lower that 80% of all the other companies out there.)
* They all have to have a Zacks #2 Rank or less.
(Meaning no 'Sells' or 'Strong Sells' allowed.)
* And this was all applied to stocks trading at or above $5, with average daily trading volumes of 100,000 shares or more.

So with this screen, we're not starting with one and then looking for the other. The order of the above parameters is irrelevant. If I switched it around, I would get the same stocks. Essentially, I'm demanding that the companies have BOTH growth rates AND valuations in the 80th percentile, i.e., better than 80% of all the other stocks out there. And better on each category. This screen also comes pre-loaded with the Research Wizard and it's called sow_growth and value. Each one of these stocks (and all of the stocks on the entire list), have market-beating growth rates with below market P/E values. A great combination.

Below are 4 stocks that made it thru this week's screen:
DB - Analyst Report Deutsche Bank
NEU - Snapshot Report Newmarket Corp.
SBS - Analyst Report Companhia De Saneamento
SEPR - Analyst Report Sepracor, Inc.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.