The start of 2022 has been rough for many growth stocks, to say the least. While 2020 and (most of) 2021 were outstanding years for growth stocks, many of those gains have been erased and valuations multiples have dropped to levels seen even before the pandemic. However, this does not mean that growth names should be disregarded. We believe that stock fluctuations over a few months or even one or two years often do not reflect the underlying quality of a stock. After the recent sell-off, we believe there are many opportunities for investors. Due to recent changes in sentiment in the market towards growth stocks and to some extent a change in risk appetite (though we believe the appetite is still strong for equities in general), many good quality companies may have been ’tossed out with the bathwater' simply for having a high valuation or even just being identified as a ”growth stock”.

Below we have screened for companies with the following criteria:

• Stock price down at least 15% year-to-date

• Expected revenue growth of at least 15% next year

• Expected EPS growth of at least 15% next year

• Debt to equity ratio below 50%

The criteria above reflect companies that have fallen in price materially this year, but continue to show both good revenue and earnings growth prospects. We filtered for both revenue and earnings because there are many large slow-growth companies that are expected to see high double-digit growth in earnings due to the ongoing recovery from the pandemic. A good quality growth stock, in our view, experiences strong growth now only in revenues but also in its earnings. 

Additionally, having manageable to low debt levels is often appreciated by investors in the long-run as the company can focus more on growing its operation than paying down debt. This is especially considered when interest rates are rising and debt serving becomes more burdensome on companies with high debts. As usual, we also filtered for a market capitalization of over $100 million. From a quality perspective, we find the $100 million threshold tends to signify that a company has reached a certain level of maturity, support from investors and market presence (of course this is not a blanket statement that applies to all companies). Members will recognize some names from our model portfolios and coverage list such as Lightspeed Commerce (LSPD) and Trisura Group (TSU). 

The full screen can be found below:

It is important to note that while we did screen for EPS growth, not all names here are profitable yet. For many of these names, EPS growth means getting closer to profitability. However, readers may notice some names are bolded. These are companies that are already profitable (positive EPS) and are expecting to grow profits further. We think this is important to highlight as over the last few months the market has shown little mercy to companies operating at a loss, especially those with the risk of falling further into the negatives year-over-year (although in some cases it can be justified for growth) or ones where the path to profitability is at risk of being questioned. 

Certainly one lesson that can be learned from the recent sell-off in growth stocks is to watch one’s exposure to high risk and high valuation names. However, we think it will remain true that high-quality stocks with sound fundamentals will deserve a premium. So while it still does not seem like growth stocks are out of the woods yet, being early and investing based on fundamentals we believe will pay off in a better market, and more importantly, in the long-run. 

As always, any companies listed on these screens are not an endorsement, but rather a starting point to help investors narrow down their options in their search for new ideas. You can view the previous month’s screener here. 

Knowledge pays the best dividends.

Disclaimer: The analyst(s) responsible for this report do not have a financial or other interest in securities mentioned.