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, 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, makes it pretty easy to find cutting-edge growth stocks.
Our proprietary system currently recommends Trend Micro Inc. (TMICY) 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).
While there are numerous reasons why the stock of this company is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings Growth
Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for Trend Micro Inc. is 2.5%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 37.6% this year, crushing the industry average, which calls for EPS growth of 11.3%.
Cash Flow Growth
Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies. That’s because, high cash accumulation enables these companies to undertake new projects without raising expensive outside funds.
Right now, year-over-year cash flow growth for Trend Micro Inc. is 15.8%, which is higher than many of its peers. In fact, the rate compares to the industry average of 9.7%.
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 13.8% over the past 3-5 years versus the industry average of 12.4%.
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.
The current-year earnings estimates for Trend Micro Inc. have been revising upward. The Zacks Consensus Estimate for the current year has surged 23.3% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Trend Micro Inc. 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 Trend Micro Inc. is a potential outperformer and a solid choice for growth investors.
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