How to pick growth stocks: the 7 steps at a glance

A growth stock is a company whose sales and earnings rise much faster than the market average. The growth investing guide covers the idea; this guide is the checklist you run on each candidate.

Each step is a filter, run in order, and most companies fail one of them. That is the point: the process says no quickly and cheaply.

  1. Screen: cut thousands of stocks to a short list.
  2. Read the numbers: revenue and EPS growth, acceleration, margins, guidance, debt.
  3. Story and moat: what it sells, why demand grows, what keeps rivals out.
  4. Valuation: P/E against growth, PEG and P/S.
  5. Price and relative strength: leaders near their highs, not falling knives.
  6. Entry, stop and size: a buy point, a stop, and shares sized from the stop.
  7. Sell rules: thesis broken, stop hit or valuation extreme.

Step 1: Screen for growth (the filters are only examples)

The drawing at the top of the page shows a typical funnel: all US stocks, then sales growth above 20%, EPS growth above 20%, near the 52-week high and strong relative strength. What comes out is a watchlist, not a buy list.

Each filter has a job. Sales growth shows demand and is harder to dress up than profit. EPS growth shows whether that demand reaches shareholders. The last two keep the stocks the market is already rewarding and drop those in downtrends.

The 20% lines are not magic: in a slow economy few companies clear them, in a boom hundreds do. Adjust each threshold until 20 to 50 names remain, and add liquidity filters (market capitalization, average volume) so you can trade without moving the price. A company growing 19% is not worse than one growing 21%; the line only decides where you spend your reading time.

How to build the screen on TradingView's Stock Screener

TradingView's Stock Screener has every filter in the drawing. Click + (or press Shift + F) to open the filter menu, grouped into Security info, Market data, Technicals, Financials, Valuation, Growth, Margins and Dividends. The names below are the ones shown when this guide was written; menus can change.

Two cautions. Relative strength index under Technicals is the RSI oscillator, not strength against the market. And confirm the key numbers in the company’s own report before trusting any screen.

  1. Open the Stock Screener and set the market to the US.
  2. Growth: add Revenue growth %, pick the period (TTM YoY, Quarterly YoY and others) and use Manual setup to enter above 20. Add Earnings per share diluted growth % the same way.
  3. Near the high: New high set to 52 weeks (under Market data), or, looser, Simple moving average (50, 1 day) set to Below Price, which keeps stocks above their 50-day average.
  4. Relative strength: Performance % over 6 months or 1 year, well above the S&P 500’s figure for the same period.
  5. Liquidity: Market capitalization (under Valuation) and Average volume (under Market data).
  6. For steps 2 and 4: Price to earnings ratio, Price to sales ratio, Price to earning to growth (the screener’s PEG, on trailing 12 months), Gross margin %, Operating margin % and Debt to equity ratio.

Step 2: Read the numbers: growth, acceleration, margins, guidance, debt

A screen sees one number; you need the last four to eight quarters. US companies file a quarterly report (Form 10-Q) for the first three quarters and an annual report (Form 10-K) that covers the fourth. Compare each quarter with the same quarter a year earlier, so seasonal swings do not fool you, and watch the base: EPS rising from $0.02 to $0.10 is +400% and means little.

Hypothetical Company A: revenue growth over the last four quarters of +22%, +26%, +31% and +34%, and EPS growth of +10%, +20%, +35% and +50%. Gross margin rose from 58% to 62%, management raised its full-year guidance, and debt to equity is 0.2. Hypothetical Company B shows EPS growth of +50%, +35%, +20% and +10%. Both pass a 20% screen on trailing numbers; only A is accelerating, as the drawing shows. No company grows 50% forever, but a buyer paying a growth price wants the bars rising, not shrinking fast.

Revenue growth (YoY)
(This quarter’s revenue − the same quarter last year) ÷ the same quarter last year × 100. TTM growth does the same with the trailing twelve months.
EPS (diluted)
(Net income − preferred dividends) ÷ weighted average common shares, including the shares that options, warrants and convertibles could add.
Margins
Gross = (revenue − cost of goods sold) ÷ revenue; operating = operating income ÷ revenue; net = net income ÷ revenue. Rising margins mean more profitable growth.
Guidance
Management’s own forecast for the next quarter or the full year. A raise supports the story; a cut is often the first crack.
Debt to equity
Total debt ÷ shareholders’ equity. A fast grower that borrows heavily has less room for a bad year.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn panels of quarterly EPS growth bars labeled Q1 to Q4: on the left, accelerating, with +10%, +20%, +35% and +50%; on the right, decelerating, with +50%, +35%, +20% and +10%.

Step 3: Explain the story and the moat in plain words

Numbers describe the past; the story is why they might continue. Write it in three plain sentences: what the company sells, why customers are buying more of it, and what stops competitors from taking them. If you cannot, you do not know the company well enough to own it.

The third sentence is the moat. The drawing shows four kinds: a brand people pay more for, a network effect (each new user makes the product more useful), switching costs that make leaving painful, and a cost advantage. A growth company with no moat attracts rivals, and rivals squeeze margins.

Hypothetical Company A sells scheduling software to clinics. Clinics buy more seats as they hire (demand), and moving years of records to another system is slow and risky (switching costs). Add a fourth sentence, what would break the story: for A, a large rival bundling a similar tool for free, or customers leaving at a rising rate. That sentence becomes a sell rule in step 7.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn castle standing for the business, surrounded by a moat with four labels, brand, network effect, switching costs and cost advantage, while small competitor arrows bounce off the water.

Step 4: Sanity-check the valuation: P/E vs growth, PEG and P/S

Growth stocks rarely look cheap, and they do not have to. The question is whether the price already assumes more than the company can deliver.

Hypothetical Company A trades at $50.00 with trailing EPS of $1.25, a P/E of 40. If you expect EPS to grow 35% a year, PEG = 40 ÷ 35 ≈ 1.1. With an $8 billion market value and $1 billion of trailing revenue, P/S = 8. Hypothetical Company C also passed steps 1 to 3, but trades at 150 times earnings while growing 30%: PEG = 5.0, and at a $14 billion value on $400 million of sales, P/S = 35. C fails here.

Mario Farina described the PEG in 1969, and Peter Lynch popularized it in One Up on Wall Street (1989), arguing that a fairly priced company’s P/E roughly equals its growth rate. It is a rule of thumb that changes with the growth figure you use (TradingView’s PEG uses trailing growth), and a very high price can fall even while the business keeps growing, as the growth vs value stocks guide shows.

P/E (price to earnings)
Share price ÷ EPS. Trailing P/E uses the last twelve months of EPS; forward P/E uses analysts’ estimates. It means nothing when earnings are negative.
PEG
P/E ÷ annual EPS growth rate, with the percentage written as a whole number: 40 ÷ 40 = 1.0. Above 1, you pay more for each point of growth.
P/S (price to sales)
Market capitalization ÷ trailing twelve-month revenue. Useful when a young company has little or no profit.

Step 5: Check price and relative strength: leaders, not falling knives

Good numbers on a stock in a downtrend often mean the market expects something the reports do not show yet, so the chart gets a vote. Favor stocks near their 52-week high, above rising 50-day and 200-day moving averages, and beating the S&P 500.

The relative strength (RS) line measures that last point: the stock price divided by the S&P 500. When it rises, the stock is outperforming. The drawing shows a pattern many growth buyers look for: the RS line makes a new high before the price does. Hypothetical Company A sits 5% below its 52-week high, is up 35% in six months against 8% for the index, and its RS line is at a new high.

Hypothetical Company B is down 40% from its high, below a falling 200-day average, with its P/E down to 18. It looks cheap, but buying it is catching a falling knife: the deceleration from step 2 is what sellers are pricing in. Stage analysis and the trend template in the volatility contraction pattern guide turn this into a rule: buy only in uptrends.

Turn your phone sideways to read the drawing. Tap to close.

Two hand-drawn panels: on top, price breaking out to a new high; below, the relative strength line (stock ÷ S&P 500), which reached its own new high earlier, circled with the note RS line: new high first.

Step 6: Plan the entry, the stop and the position size

A good company bought at a random moment can still drop 20% the next week, so many growth buyers wait for a base, a sideways rest after a run, and buy as price leaves it. In William O’Neil’s CAN SLIM method, the classic base is the cup with handle in the drawing: a rounded cup, a short handle drifting down in the upper half of the cup, and a buy point at the top of the handle, ideally cleared on above-average volume.

Hypothetical Company A’s handle tops out at $50.00, and a daily candle closes at $50.40 on about twice its average volume: entry. O’Neil’s rule cuts any loss at no more than 7–8% below the buy point; 7% below $50.00 puts the stop at $46.50.

Sizing, hypothetical: a $50,000 account risking 1% accepts a $500 loss. The risk is $50.40 − $46.50 = $3.90 a share, so $500 ÷ $3.90 = 128 shares, about $6,450 or 13% of the account. The position size calculator does this math for you.

The failure case: two days later A closes back inside the base, then at $46.40. You sell for a loss of about $512, roughly 1% of the account plus costs, and wait for a new base. A stop does not protect against gaps: if bad news after the close opens A at $42.00, you lose $8.40 a share, about $1,075, more than twice the plan. Keep single positions modest, especially into an earnings report.

If you also day trade names from your watchlist, UpTickFlow, our invite-only TradingView indicator, draws an entry, a stop and a target after a closed candle at a level on 5-minute to 1-hour charts. It does not screen fundamentals or pick stocks.

Turn your phone sideways to read the drawing. Tap to close.

A hand-drawn cup-with-handle base after a prior uptrend: a rounded U-shaped cup, a short handle drifting slightly down in the upper half of the cup, a dashed buy point line at the top of the handle, a candle closing above it on a tall volume bar (volume quieter in the handle), and a dotted stop line below the buy point labeled stop 7–8%.

Step 7: Decide when to sell before you buy

Write the sell rules when you buy, while you are calm. Any one of the three below is enough.

Hypothetical: months later, Company A reports revenue growth of 18%, down from 34%, and cuts its guidance while the price is still above your stop. The thesis, accelerating growth, is broken: sell or cut rather than wait for the stop. The opposite mistake is dumping a healthy leader on its first dip; if the numbers and the chart hold, the plan says hold.

Keep a short journal of why you bought and why you sold. Growth methods fail often, and only the record shows whether your process works; the trading plan guide has a template.

  • Thesis broken: growth slows sharply, guidance is cut, margins shrink, or the “what would break it” sentence from step 3 comes true.
  • Stop hit: the price closes below your stop. Sell, and never move the stop lower; you may raise it as the stock rises.
  • Valuation extreme: the P/E sits far above the growth rate (a PEG of 3 or more, for example) while growth is flat or slowing. Selling part of the position is a reasonable middle ground.