The popularity of growth investment is growing by leaps and bounds, primarily because it is one of the favorite investing mantras followed by successful investors. The Growth Scorecard evaluates sales and earnings growth along with other important growth measures. Growth investors generally have high risk tolerance and are continuously on the lookout for above-average growth stocks that are expected to outperform the broader industry with respect to revenues, earnings or cash flow.
However, this apparently simple growth investment technique has some drawbacks and lack of proper understanding of the strategy may often lead to short listing of growth stocks that are a misfit to the portfolio. Since growth investors seek capital gains, they tend to remain exposed to high risks.
In a bull market, it has been popularly said that a stock keeps scaling new highs until some event works against it. However, the timing of the pullback is hard to gauge.
An Insight into the Zacks Methodology
Our latest Style Score System has made the task of choosing a suitable growth stock much simpler.Our Growth Style Score highlights all evaluation metrics and represents them as one score that cautions investors regarding “growth traps” and helps them find stocks that have high growth potential.
Our research shows that stocks with a Growth Style Score of A or B when combined with a Zacks Rank #1 (Strong Buy) or 2 (Buy) offer the best upside potential.
For investors looking for this combination, we have identified a candidate which may prove to be impressive growth pick — Chemed Corporation (CHE - Free Report) . The stock has a favorable Zacks Rank #2 and a Growth Score of A.
What’s Working in Favor of Chemed?
Chemed has a favorable VGM Score of B. The VGM Score is simply a weighted combination of the parameters Value, Growth and Momentum. It is a comprehensive tool that allows investors to filter through the standard scoring system and pick the winning stocks.
Historical EPS Growth
The company also has favorable historical earnings per share (EPS) growth rate of 13.9% when compared to the broader industry’s 11.7%. Historical EPS growth rate considers the average annual (trailing 12 months) EPS growth rate over the last 3-5 years of actual earnings.
Net Margin shows the percentage of profit a company earns on its sales. The company has a favorable Net Margin (Net Income/ Sales) of 4.16%, far better than the broader industry’s 3.32%.
Return on Equity
Return on Equity (or ROE) is calculated as income divided by average shareholder equity (past 12 months, including reinvested earnings). The income number is listed on a company's Income Statement. Also, the ROE stands favorable at 21.45% compared to broader industry’s 11.13%.
Sales to Assets Ratio
The Sales to Assets ratio (or Sales to Total Assets or S/TA for short) shows how much sales are generated from a company's assets. As the name suggests, it's calculated as sales divided by assets. This is also commonly referred to as the Asset Utilization ratio.
TheSales/Assets ratio of 1.78% supports the company as a solid growth stock in comparison to the industry’s 0.85%.
In this regard, we note that Chemed’s bright prospects in the VITAS business and continuous expansion in the Roto-Rooter business adds to its prospects.
Other Growth Stocks to Consider
Other growth picks in the medical sector that are worth mentioning are Lantheus Holdings, Inc. (LNTH - Free Report) , Amedisys, Inc. (AMED - Free Report) and Masimo Corporation (MASI - Free Report) .
Lantheus carries a Zacks Rank #2 and a Growth Score of A.
Amedisys carries a Zacks Rank #2 and a Growth Score of A.You can see the complete list of today’s Zacks #1 Rank stocks here.
Masimo carries a Zacks Rank #2 and a Growth Score of B.
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