How To Find Sane Growth Stocks + 2012's Picks

About a year ago, we used the YCharts Stock Screener to help find ”Sane Growth” stocks that cautious investors might find palatable. This little experiment led to such nice results – the seven picks are up an average 23% as a group, with no share gaining less than 15% -- that we're eager to try it again. But first, a look at that inaugural class.

The “Sane Growth” screen aimed to reduce the risk of growth investing. Although fast revenue growth can feed strong share price gains, growth stocks are notoriously vulnerable to sudden share price dives at the first whiff of bad news. So we quickly set the Stock Screener to weed out companies with certain particularly risky features common in growth stocks. The results led us to suggest seven companies for more conservative portfolios: Coinstar, its name has since changed to Outerwall, (OUTR), VF Corp. (VFC), Davita (DVA), United Natural Foods (UNFI), Dollar General (DG), Airgas (ARG), and Oil States International (OIS).

OUTR data by YCharts

DG data by YCharts

To be fair, all those stocks were helped by the market's general strength in the past 14 months. The S&P 500 Index's rise of 20% exceeded three of them. But even bullish markets don't always protect growth stocks when bad news arises. A sampling of hot growth stocks turned sour in that rallying market includes SolarWinds (SWI), Rackspace (RAX), Intuitive Surgical (ISRG), Riverbed Technology (RVBD), Red Hat (RHT), Aruba Networks (ARUN), CafePress (PRSS), Body Central (BODY) and Crocs (CROX).

SWI data by YCharts

RHT data by YCharts

The screen that uncovered our seven gainers was set to find companies with sales growth of over 10% in the previous 12 months and at least that rate of retained earnings growth. It kicked out companies with historic price-to-sales ratios of more than 1.5, and YCharts fundamentals scores under 7. The market cap minimum was set at $2.5 billion.

While no investment should be based on a screen alone, it can make investment research much less daunting. In this case, we used the data to narrow our field of possibilities to dozens from thousands. From those, we looked for companies with compelling growth stories and whose immediate challenges to execution appeared minimal.

The YCharts Stock Screener has added hundreds of new metrics since last fall that can make this research far more sophisticated. For a repeat experiment, we'll consider adding forward share price ratios, enterprise valuations and short interest, for example. For investors who prefer to make their own fundamentals ratings, there are numerous liquidity metrics, as well as detailed balance sheet, cash flow and other financial data. Searches also can be limited by sector, indices and geography, to name a few parameters.

We note that running last year's basic Sane Growth screen yields a different set of companies today. Some of the stories have changed too. DaVita, a dialysis clinic operator that makes the repeat list, has taken a down turn on a Medicare payment problem that may get worse, for example. It may be time to take some profits in the Class of last September and move on to other growth stocks. But best do some more research first.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.