Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market’s attention and deliver solid returns. But finding a great growth stock is not easy at all.
That’s because, these stocks usually carry above-average risk and volatility. In fact, betting on a stock for which the growth story is actually over or nearing its end could lead to significant loss.
However, it’s pretty easy to find cutting-edge growth stocks with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company’s real growth prospects.
Sally Beauty (SBH) is one such stock that our proprietary system currently recommends. The company not only has a favorable Growth Score, but also carries a top Zacks Rank.
Studies have shown that stocks with the best growth features consistently outperform the market. And returns are even better for stocks that possess the combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy).
While there are numerous reasons why the stock of this beauty products seller is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Sally Beauty is 4.1%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 76% this year, crushing the industry average, which calls for EPS growth of -15.5%.
Impressive Asset Utilization Ratio
Asset utilization ratio — also known as sales-to-total-assets (S/TA) ratio — is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.
Right now, Sally Beauty has an S/TA ratio of 1.29, which means that the company gets $1.29 in sales for each dollar in assets. Comparing this to the industry average of 1.23, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Sally Beauty is well positioned from a sales growth perspective too. The company’s sales are expected to grow 8.4% this year versus the industry average of 0%.
Promising Earnings Estimate Revisions
Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.
There have been upward revisions in current-year earnings estimates for Sally Beauty. The Zacks Consensus Estimate for the current year has surged 1.1% over the past month.
While the overall earnings estimate revisions have made Sally Beauty a Zacks Rank #2 stock, it has earned itself a Growth Score of B based on a number of factors, including the ones discussed above.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This combination positions Sally Beauty well for outperformance, so growth investors may want to bet on it.
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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.