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, 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.
A.O. Smith (
AOS Quick Quote AOS - 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.
Research shows that stocks carrying the best growth features consistently beat 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 maker of water heaters and boilers a great growth pick right now.
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 A.O. Smith is 3.8%, investors should actually focus on the projected growth. The company's EPS is expected to grow 23.1% this year, crushing the industry average, which calls for EPS growth of 23%.
Impressive Asset Utilization Ratio
Growth investors often overlook asset utilization ratio, also known as sales-to-total-assets (S/TA) ratio, but it is an important feature of a real growth stock. This metric shows how efficiently a firm is utilizing its assets to generate sales.
Right now, A.O. Smith has an S/TA ratio of 0.99, which means that the company gets $0.99 in sales for each dollar in assets. Comparing this to the industry average of 0.66, it can be said that the company is more efficient.
While the level of efficiency in generating sales matters a lot, so does the sales growth of a company. And A.O. Smith is well positioned from a sales growth perspective too. The company's sales are expected to grow 13.9% this year versus the industry average of 9.1%.
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 A.O. Smith. The Zacks Consensus Estimate for the current year has surged 5.2% over the past month.
While the overall earnings estimate revisions have made A.O. Smith a Zacks Rank #2 stock, it has earned itself a Growth Score of A 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 A.O. Smith is a potential outperformer and a solid choice for growth investors.