gRowth stocks are attractive to many investors because above average financial growth makes it easy for these stocks to grab market attention and produce exceptional returns. However, finding good growing stock is not easy.
This is because these stocks generally involve higher than average risk and volatility. In fact, betting on a stock where the Growth story has actually ended or is nearing an end could result in a large loss.
However, the Zacks Growth Style Score (which is part of the Zacks’ style scores system), which goes beyond traditional growth attributes to analyze a company’s actual growth prospects, makes it quite easy to find leading growth stocks.
One of those actions our proprietary system currently recommends is Transcat, Inc. (TRNS). The company not only has a favorable growth score, but also holds a higher Zacks ranking.
Research shows that stocks with the best growth characteristics consistently beat the market. And returns are even better for stocks that have the combination of a Growth Score of A or B and a Zacks # 1 (strong buy) or 2 (buy) rating.
Here are three of the most important factors that make this company’s stock a great choice for growth right now.
Earnings growth is arguably the most important factor, as stocks with unusually high levels of earnings tend to grab the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of a strong outlook (and stock price gains) for the company under consideration.
While the historic EPS growth rate for Transcat, Inc. is 17.9%, investors should actually focus on projected growth. The company’s EPS is expected to grow 71.5% this year, beating the industry average, which calls for EPS growth of 39.8%.
Cash flow growth
Cash is the lifeblood of any business, but above average cash flow growth is more beneficial and important for growth-oriented businesses than for mature businesses. Indeed, a high accumulation of liquidity allows these companies to undertake new projects without raising expensive external funds.
Currently, year-over-year cash flow growth for Transcat, Inc. is 4.4%, which is higher than many of its peers. In fact, the rate compares to the industry average of -11.2%.
While investors should actually be mindful of the current growth in cash flow, it’s also worth taking a look at the historic rate to put the current reading in perspective. The annualized growth rate of the company’s cash flow has been 13.8% over the past 3-5 years, compared to an industry average of 5.5%.
Revisions to promising earnings estimates
Beyond the measures described above, investors should take into account the trend in revisions to earnings estimates. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Transcat, Inc.’s earnings estimates for the current year have been revised upwards. Zacks’ consensus estimate for the current year has jumped 2.5% over the past month.
Although the overall revisions to earnings estimates made Transcat, Inc. a Zacks Rank # 2 stock, it earned a growth score of A based on a number of factors, including those discussed. above.
This combination indicates that Transcat, Inc. is a potential outperformator and a solid choice for growth investors.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.