Back to top

Image: Bigstock

3 Reasons Why Growth Investors Shouldn't Overlook Sleep Number (SNBR)

Read MoreHide Full Article

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. However, it isn't easy to find a great growth stock.

In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing from a stock whose growth story is actually over or nearing its end.

However, the task of finding cutting-edge growth stocks is made easy 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.

Sleep Number (SNBR - Free Report) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it carries a top Zacks Rank.

Studies have shown that stocks with the best growth features consistently outperform the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.

Here are three of the most important factors that make the stock of this seller of beds, mattresses and bedding products a great growth pick right now.

Earnings Growth

Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. 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 Sleep Number is 28.3%, investors should actually focus on the projected growth. The company's EPS is expected to grow 18.1% this year, crushing the industry average, which calls for EPS growth of 15.7%.

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 exhibits how efficiently a firm is utilizing its assets to generate sales.

Right now, Sleep Number has an S/TA ratio of 2.21, which means that the company gets $2.21 in sales for each dollar in assets. Comparing this to the industry average of 1, it can be said that the company is more efficient.

In addition to efficiency in generating sales, sales growth plays an important role. And Sleep Number is well positioned from a sales growth perspective too. The company's sales are expected to grow 10.2% this year versus the industry average of 2.5%.

Promising Earnings Estimate Revisions

Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable 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 Sleep Number. The Zacks Consensus Estimate for the current year has surged 37.5% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Sleep Number a Zacks Rank #1 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 indicates that Sleep Number is a potential outperformer and a solid choice for growth investors.


See More Zacks Research for These Tickers


Normally $25 each - click below to receive one report FREE:


Sleep Number Corporation (SNBR) - free report >>

Published in