Investing in growth stocks. Identifying good companies at good valuations.

I look for this when I buy growth stocks. 

I haven't invested in any growth stocks...yet! Waiting for the crash, then will pick up Square (SQ) cheap. Or anything. 

I look at these three specific criteria on finviz: 

1. Gross margin over 30%. 
2. Past 5 years sales growth over 15%. (CAGR > 15%.)
3. P/S = 4 or lower. I will tell you why, there is a very specific reasoning. 

There are many more metrics. Less debt, high insider ownership, but I don't want to exclude good companies. 

Reasoning:

1) A good high margin business means over time as scale is reached, more profits will fall down to bottom line (profit.) Operating margin will gradually improve, I am not worried. Look at Mastercard. 

2) This defines growth stock. I want it to grow insane. I expect it to grow exponentially going forward. 

3) P/S = 4 cannot be more than 4. This is valuation. I cannot overpay for a stock. Obviously I want to pay cheaper but I find that good growth stocks never reach p/s below 3-4. I have studies. If you can catch some at the level, it's crazy. Obviously for the very growth stocks we can pay up. We have to pay up. But otherwise p/s = 4 is good. 

If it's in its early stages of development low debt will make sure it doesn't eat itself up. For young growth stocks it is essential that there is high insider ownership to make sure the company goes right in the long term and not guided by short term incentives that can hurt itself. Not necessary, but always something to see. If the CEO has $10,000,000 worth of stock, he will wake up at 2 am to take care of his baby.

Earnings is not necessary (net income.) I expect them to improve their margins quickly so that EBITDA is positive. Often what you see is that the really good companies have positive ebitda immediately, so that they don't burn cash. They do burn cash to grow aggressively. If you look at Amazon, Facebook, all had positive ebitda almost immediately. This is the sign of a sustainable company. Not necessary, but comforting. It lives off its own cash, it doesn't need cash injections (equity+debt). 

Study:

CRM- lowest p/s it ever went- 3.09    2009 crash

FRPT- p/s = 2.04                                 2016 shortly after IPO (lock-up)

MA- p/s = 3.52                                    2008 crash

MSCI- p/s = 3.44                                2008 shortly after IPO and crash

SQ- p/s = 2.19                                    At IPO, never got cheaper

Many stocks out there that never dipped below p/s = 4. We have been in a crazy overvalued bull market. Things are always priced in years ahead because of low interest rates, pension funds and endowments and other "safe" investors come into stock market for yield because there's nothing in bonds.