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.
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 Teradyne (TER) 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 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.
While there are numerous reasons why the stock of this maker of wireless products, data storage and equipment to test semiconductors is a great growth pick right now, we have highlighted three of the most important factors below:
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 Teradyne is 22.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 8.9% this year, crushing the industry average, which calls for EPS growth of -17.6%.
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 shows how efficiently a firm is utilizing its assets to generate sales.
Right now, Teradyne has an S/TA ratio of 0.91, which means that the company gets $0.91 in sales for each dollar in assets. Comparing this to the industry average of 0.57, it can be said that the company is more efficient.
While the level of efficiency in generating sales matters a lot, so does the sales growth of a company. And Teradyne is well positioned from a sales growth perspective too. The company's sales are expected to grow 13.1% this year versus the industry average of -6.1%.
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 Teradyne. The Zacks Consensus Estimate for the current year has surged 1.1% over the past month.
While the overall earnings estimate revisions have made Teradyne 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.
This combination indicates that Teradyne is a potential outperformer and a solid choice for growth investors.
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Teradyne, Inc. (TER): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.