Investors are rightfully willing to pay premiums for stocks with explosive earnings growth, but in uncertainty market conditions, it is best to avoid growth stocks with sluggish analyst revision activity and inflated valuations. One such company is QAD Inc. (QADA - Free Report) .
QAD Inc. is a global provider of enterprise software applications. The company's core product, QAD Enterprise Applications, is an integrated suite of software applications deployable in computer infrastructures, on demand and on premise deployment as well underlying databases, hardware platforms and operating systems.
QAD promises dramatic improvements to its bottom line this fiscal year, but analysts have begun to sour on its prospects, and negative revision activity has earned the stock a Zacks Rank #5 (Strong Sell).
Estimate Revision Activity
Over the past 60 days, the Zacks Consensus Estimates for QAD’s current fiscal year and next year have slumped considerably, thanks—at least in part—to negative estimate revisions. These consensus projections are now 10 cents and 13 cents lower, respectively, than they were just two months ago.
The Zacks Rank is a proven model that places a significant emphasis on estimates and estimate revisions, and we have found that negative revision activity often foreshadows volatility for a stock. But the concerns do not stop there for QADA.
Even with its lowered expectations, QAD is projected to report EPS growth of a staggering 536.4% in the current fiscal year. That type of earnings improvement typically allows for stretched valuations, with growth investors piling in on the back of bottom-line expansion more so than anything else.
However, growth investors will be cognizant of the company’s volatile earnings outlook, leading us to once again question the QADA’s stretched valuation.
Shares of the enterprise software stock are currently trading at more than 94x forward 12-month earnings. This is more than triple the industry average of about 31x. Meanwhile, the stock also has a P/S ratio of 2.9, so investors are not getting an awfully good deal for the company’s revenue picture either.
The company also does not have a great cash situation right now. Cash flow is sitting at -$0.17 per share, with cash flow growth coming in at -143.5%. This should cause us to question whether the company can sustain any positive momentum that might be caused by earnings growth in the long term.
Finally, investors should note that shares have already surged more than 50% over the past year, implying that its EPS improvement is probably priced in. This does not look like a stock that will challenge its 52-week high soon.
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