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.
Wex (WEX) 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.
Research shows that stocks carrying the best growth features consistently beat 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 provider of fuel payment processing for fleet vehicles a great growth pick right now.
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. 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 Wex is 5.5%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 24.9% this year, crushing the industry average, which calls for EPS growth of 23.4%.
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 Wex is 31.2%, which is higher than many of its peers. In fact, the rate compares to the industry average of 12.5%.
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 14.6% over the past 3-5 years versus the industry average of 13.5%.
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.
There have been upward revisions in current-year earnings estimates for Wex. The Zacks Consensus Estimate for the current year has emerged 9.9% over the past month.
While the overall estimate earnings revisions have made Wex 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 Wex is a potential outperformer and a solid choice for growth investors.
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