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3 Reasons Why Growth Investors Shouldn't Overlook Commercial Metals (CMC)

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Investors seek growth stocks to capitalize on above-average growth in financials that help these securities grab the market's attention and produce exceptional returns. But finding a growth stock that can live up to its true potential can be a tough task.

By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.

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.

Commercial Metals (CMC - 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.

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).

Here are three of the most important factors that make the stock of this manufacturer and recycler of steel and metal 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. 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 Commercial Metals is 41.6%, investors should actually focus on the projected growth. The company's EPS is expected to grow 62% this year, crushing the industry average, which calls for EPS growth of -22.8%.

Cash Flow Growth

While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.

Right now, year-over-year cash flow growth for Commercial Metals is 30.7%, which is higher than many of its peers. In fact, the rate compares to the industry average of -20.7%.

While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 21.1% over the past 3-5 years versus the industry average of 6.4%.

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 Commercial Metals. The Zacks Consensus Estimate for the current year has surged 26% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Commercial Metals 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 Commercial Metals is a potential outperformer and a solid choice for growth investors.


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