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 great growth stock is not easy at all.
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, 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.
Our proprietary system currently recommends Nvidia (NVDA - Free Report) as one such stock. This 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 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 graphics chips for gaming and artificial intelligence a great growth pick right now.
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 Nvidia is 43.9%, investors should actually focus on the projected growth. The company's EPS is expected to grow 34.6% this year, crushing the industry average, which calls for EPS growth of -13.8%.
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 exhibits how efficiently a firm is utilizing its assets to generate sales.
Right now, Nvidia has an S/TA ratio of 0.71, which means that the company gets $0.71 in sales for each dollar in assets. Comparing this to the industry average of 0.68, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Nvidia looks attractive from a sales growth perspective as well. The company's sales are expected to grow 21.6% this year versus the industry average of -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 Nvidia. The Zacks Consensus Estimate for the current year has surged 6.1% over the past month.
While the overall earnings estimate revisions have made Nvidia 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 Nvidia is a potential outperformer and a solid choice for growth investors.