WHAT ARE WE LOOKING FOR?
The best growth stocks for next year.
MORE ABOUT TODAY'S SCREEN
It would be easy to look for the stocks that simply have the best estimated earnings growth rates for next year, but let's look for stocks that are showing a little more consistent growth. We'll look for ones that are expected to show at least 10-per-cent earnings growth this year and are expected to show at least that much growth next year, too.
We want to make sure we aren't just finding companies that are showing profit growth through cost cutting, so let's look for stocks that should also show 10-per-cent revenue growth this year and next as well.
WHAT DID WE FIND OUT?
When we were looking for companies with sales and earnings growth of 20 per cent for this year and next, just four companies passed the test: Agnico Eagle, Red Back Mining, Research In Motion and SXC Health. Of the four, Research In Motion has the cheapest price-to-earnings ratio, despite being a company with a long track record for high growth. The problem is that analysts see earnings growth declining from 26 per cent this year, to 21 per cent to negative two per cent in 2011 (2011 isn't shown in this table).
So it looks like the market is clearly worried about paying for growth that is going to stall. But let's dig into this further to confirm. One issue with this screen is that only five analysts are shown for the Research In Motion estimates based on the Canadian ticker. In fact, there is only one estimate recorded for 2011 so far with the Canadian ticker. By comparison, there are more than 40 analysts following the stock when you search under the U.S. ticker.
Using the U.S. ticker RIMM, analysts' estimated earnings growth rates slow from 25 per cent this year, to 15 per cent to four per cent in 2010 - not that different than the estimates under the Canadian ticker. There are 46 analyst estimates for next year and only a dozen so far for 2011 so it's still early. The market will be watching for 2011 forecasts in the new year, but it will take a dramatic change in growth assumptions if the stock is going to earn a higher P/E.