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 near its end could lead to a 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 Tractor Supply (TSCO) 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 retailer for farmers and ranchers 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 Tractor Supply is 24.7%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 5.5% this year, crushing the industry average, which calls for EPS growth of 0%.
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 Tractor Supply is 23.8%, which is higher than many of its peers. In fact, the rate compares to the industry average of -8.1%.
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 a proper perspective. The company’s annualized cash flow growth rate has been 16.9% over the past 3-5 years versus the industry average of 8%.
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 estimate revisions and near-term earnings stock price movements.
There have been upward revisions in current-year earnings estimates for Tractor Supply. The Zacks Consensus Estimate for the current year has surged 8.9% over the past month.
Tractor Supply has not only earned a Growth Score of B based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #1 because of the positive earnings estimate revisions.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This combination positions Tractor Supply well for performance, so growth investors may want to bet on it.
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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.