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Looking for a Growth Stock? 3 Reasons Why Watsco (WSO) is a Solid Choice
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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 growth stock that can live up to its true potential can be a tough task.
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.
Watsco (WSO - Free Report) 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.
Research shows that stocks carrying the best growth features consistently beat 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).
Here are three of the most important factors that make the stock of this heating and cooling company 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. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Watsco is 9.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 27.8% this year, crushing the industry average, which calls for EPS growth of 27.1%.
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, Watsco has an S/TA ratio of 2.07, which means that the company gets $2.07 in sales for each dollar in assets. Comparing this to the industry average of 1.76, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Watsco looks attractive from a sales growth perspective as well. The company's sales are expected to grow 13.5% this year versus the industry average of 7.2%.
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.
The current-year earnings estimates for Watsco have been revising upward. The Zacks Consensus Estimate for the current year has surged 2.1% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Watsco 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.
Image: Bigstock
Looking for a Growth Stock? 3 Reasons Why Watsco (WSO) is a Solid Choice
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 growth stock that can live up to its true potential can be a tough task.
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.
Watsco (WSO - Free Report) 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.
Research shows that stocks carrying the best growth features consistently beat 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).
Here are three of the most important factors that make the stock of this heating and cooling company 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. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Watsco is 9.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 27.8% this year, crushing the industry average, which calls for EPS growth of 27.1%.
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, Watsco has an S/TA ratio of 2.07, which means that the company gets $2.07 in sales for each dollar in assets. Comparing this to the industry average of 1.76, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Watsco looks attractive from a sales growth perspective as well. The company's sales are expected to grow 13.5% this year versus the industry average of 7.2%.
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.
The current-year earnings estimates for Watsco have been revising upward. The Zacks Consensus Estimate for the current year has surged 2.1% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Watsco 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 positions Watsco well for outperformance, so growth investors may want to bet on it.