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How To Research Growth Stocks: How This IBD Tool Simplifies The Search For Top Stocks

Sometimes, simple tools are the best when it comes to improving and perfecting how to research growth stocks. Treat the IBD Composite Rating, easily searchable at IBD Stock Checkup, as one such easy-to-use yet comprehensive tool.

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The rating contains a mix of five other IBD stock ratings. The EPS, Relative Price Strength, Accumulation/Distribution, Sales+Margins+ROE and Industry Group Rating all come together. It combines the values of all those ratings to arrive at a single score of 1 to 99, where the best is 99.

While there's nothing fancy about this formula, it does provide an incredible amount of number crunching. Each of the ratings that go into the Composite score represents calculations of vast amounts of data in IBD's decades-old database.

How To Research Growth Stocks: Simplify The Analysis

And the ratings focus on the factors most influential in the success of a stock, based on decades of market research. For example, we know from this research that current profit growth (the C in IBD's CAN SLIM system) is the single most important determinant of stock gains, even before stocks start major price runs.

To wit, the EPS Rating tells you how a company stacks up in terms of year-over-year gains in earnings per share in the two most recent quarters, as well as in the longer term.

The Relative Strength (RS) Rating compares how a stock has performed vs. thousands of its peers over the past year. The Accumulation/Distribution Rating neatly explains recent trends in institutional buying vs. selling.

The SMR Rating gauges important fundamentals beyond earnings, and the Industry Group RS Rating tells how well the company and its peers are performing.

The EPS and RS Ratings do get higher weightings in the Composite Rating. In addition, the stock's distance from its 52-week high is factored in. Together with the other elements, investors have all the key factors to start researching a potential winner.

How high should the Composite Rating be? Generally, any score of 90 or higher is considered worthy of consideration. Ratings of 95 or higher form a pool of even better-quality stocks.

The best way to use the Composite is to watch for stocks that have 90-plus scores and are forming bases or in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs.

In July 2019, Ultimate Software had a 99 Composite Rating and was finding strong institutional support at the 10-week moving average. From an entry around 261, it climbed as high as 332.43, or 27%. (Ultimate Software no longer trades publicly after $11 billion buyout from an investor group in 2019.)

PetIQ (PETQ) had a 95 Composite while it stalled after a breakout on July 2, 2018, but soon vaulted off the 10-week line in mid-August of that year.

How To Get The Composite Rating

You can find the Composite Rating in the stock quotes and at Stock Checkup at Investors.com. Also see it in the NYSE and Nasdaq stock tables of IBD Weekly, as well as in the mini charts of the IBD 50, IBD Big Cap 20, Sector Leaders and other premium screens.

A version of this column was first published on Dec. 7, 2018, and on Jan. 2, 2020. 

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