Aggressive growth stocks can be some of the most rewarding stocks out there.
You’ll often find smaller cap stocks in this category because smaller cap stocks are typically newer companies in the early part of their growth cycle. Of course, they don’t all have to be small cap stocks. They can be mid-caps stocks and even large-cap stocks too.
But a word of caution, it’s not as easy as just looking for stocks with the highest growth rates. So don’t go out and start looking for stocks with a 500% or 1,000% growth rate. While there will definitely be stocks out there like that which will do well, studies have shown that those kinds of companies will typically underperform. In fact, often times, you’ll see companies with the highest growth rates perform almost as poorly as those with the lowest growth rates.
One of the reasons for this is because many growth stocks are priced for perfection. For example: a stock that earns 1 cent, that is then expected to earn 6 cents, is a 500% growth rate. Now let’s say, for whatever reason, the analysts now believe they'll only earn 5 cents. That's still a 400% growth rate. But that's also -100 points less than the original growth rate and a -16.6% downward earnings estimate revision.
And if you’re the person that just got into that stock the day before, and you’re wondering why on earth a 400% growth rate stock is going down? That’s why!
Since stocks with the highest growth rates underperform; instead, look for stocks with growth rates above the median for their industry, but with growth rates less than 50%.
Why 50%? Because in my testing, I have found that once you get above 50%, the returns start to drop. It’s usually because those growth rates are just simply unsustainable. And for the ones above 50% that do pan out, many of them will carry with it a higher degree of risk.
So when looking for aggessive growth stocks, use head. Im[pressive growth rates. Better than the industry. But not so crazy high above it so they're ready for a fall.