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.
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.
Our proprietary system currently recommends Silicon Motion (SIMO - Free Report) as one such stock. This 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 chip company 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 Silicon Motion is 3.2%, investors should actually focus on the projected growth. The company's EPS is expected to grow 22.2% this year, crushing the industry average, which calls for EPS growth of 1.1%.
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, Silicon Motion 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 0.64, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Silicon Motion looks attractive from a sales growth perspective as well. The company's sales are expected to grow 20.4% this year versus the industry average of 2.6%.
Promising Earnings Estimate Revisions
Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus 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 Silicon Motion have been revising upward. The Zacks Consensus Estimate for the current year has surged 1.2% over the past month.
While the overall earnings estimate revisions have made Silicon Motion a Zacks Rank #2 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 Silicon Motion is a potential outperformer and a solid choice for growth investors.