The Best Growth Stocks

Zacks

This rally has been a big one.

It has been driven by growing profit margins, which, in turn, inflated PEs. All of this helped push stocks up more than 100% since bottoming a few years ago. We keep making new highs, and investors are starting to get a little uneasy.

There is still growth left in this bull run; it has just become a little harder to find. A good practice when searching for growth is to get a good understanding of how and why we got to where we are.


A Quick Look Back

Over the course of the last few years, stocks have recouped all that they lost (and more) from the financial crisis of 2008. Since that time, the economy has expanded and job growth has brought down unemployment levels, while earnings growth has been a big driver.

Rates have remained very low and the confidence slowly returned to the stock market.

As the expansion wore on, the market allowed for larger PEs, which drove big gains in the stock market. Now profits are starting to slow, yet the PEs remain pretty high. This has investors searching for where to find the remaining growth that is left in this rally.

More . . .


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20 Home Run Stocks from Zacks

After Zacks declared Tesla Motors (TSLA) a 'Home Run Stock', it boomed more than +135% in just 4 months. Other recently closed gains include Methode (MEI) +90.7% and Live Nation (LYV) +81.3%. Currently, a wireless communication stock has soared more than +172% and the end isn't yet in sight.

In the past two years, this home run strategy has gained +63% overall.

Learn its secret and see the latest stocks >>

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One Answer For Growth

One growth driver that looks to pick up in the coming months and quarters is the resurgence of mergers and acquisitions, or M&A for short.

As cycles mature, organic growth begins to slow, especially for larger companies. They have collected all the low hanging fruit and initiated cost cuts and new projects, but they cannot keep up with the still lofty year-over-year comparisons to sales growth. They must find new growth sources from outside the company.

Enter the M&A bankers. They push tons of ideas at managers that are sitting on massive cash hoards. They need the growth, but they are also weary of paying 'too much' for the growth they need.

Buying stocks based on the idea of impending M&A, however, is not something investors should do. Far too often the expected deals never come to fruition and only a small benefit is gained by investing in the right sector.


The Best Answer

Investors searching for an answer to the growth question will probably look to the stocks that outperformed more recently. Small cap stocks have been the answer to the growth question for some time now. What's more is that they are expected to continue to grow in 2014.

This expected growth gives a twofold foundation for further outperformance in 2014. The first is that their continued growth will afford those stocks higher PEs. That is just a simple market truism, as stocks that grow their earnings tend to receive higher PE multiples and both of those factors lead to higher stock prices.

The second idea hints back to M&A. Managers that are searching for growth will acquire the small companies that can provide it, and even if you don't pick the ones that get bought up, the rising tide will lift all ships.


Conclusion

The easy money from this rally has already been made in the early part of the economic expansion. Investors would be wise to expect a consolidation of growth rates among larger stocks. While M&A is likely to heat up in the coming months, investors should not solely buy stocks they believe are M&A targets. Where investors are likely to see the best returns is adding a number of small caps, as they still offer growth and the segment will benefit from increased M&A.


How To Find Some Special Small Caps

If you would like to explore stocks with exceptional growth prospects in 2014, I invite you to look into my Zacks Home Run Investor.

For the past two years, this strategy has substantially outperformed the market with an overall gain of +63%. The secret to success is narrowing down strong Zacks Rank stocks to the few that can blast through the normal 1 to 3-month profit cycle. These generally small cap companies are predicted to generate positive earnings surprises quarter after quarter. We typically hold them from 6 to 18 months.

Our portfolio recently closed a +135% gain in Tesla (TSLA), +90.7% in Methode (MEI), and +81.3% in Live Nation. We are still riding a wireless communication company that is up +170% as I write this. And next week, as the New Year unfolds, I am getting ready to add a company with potential to equal or surpass these gains.

In fact, you may see that stock along with all the buys and sells of all Zacks' portfolios for the total sum of only $1.

Learn more about Home Run Investor now >>

All the best,

Brian Bolan

Brian is one of the hottest hands at Zacks, an aggressive growth expert who specializes in double-digit stock gains. He is the editor of the Zacks Home Run Investor.




Zacks Investment Research

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