Growth investors seek stocks with above-average financial growth, as these securities often attract market attention and deliver solid returns. However, finding a growth stock that lives up to its potential can be challenging due to their inherent risk and volatility. Investing in a stock where the growth story is over or nearing its end can lead to significant losses.
The Zacks Growth Style Score provides a valuable tool for identifying cutting-edge growth stocks by analyzing a company’s real growth prospects beyond traditional growth metrics. Frontdoor (FTDR), a home services provider, is one such stock currently recommended by the system. In addition to a favorable Growth Score, it boasts a top Zacks Rank, indicating its potential for outperformance.
Research has shown that stocks with strong growth features consistently outperform the market. Stocks with a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy) tend to deliver even better returns. Here’s a breakdown of three key factors that make Frontdoor an attractive growth pick:
Earnings Growth:
Earnings growth is arguably the most critical factor for growth investors. Stocks with exceptional profit growth tend to draw attention and attract investors. Double-digit earnings growth is highly desirable, as it often suggests strong prospects for the company and its stock price. While Frontdoor’s historical EPS growth rate is 4.8%, investors should focus on the projected growth. The company’s EPS is expected to grow by 18.6% this year, exceeding the industry average of 11.9%, indicating robust future earnings potential.
Impressive Asset Utilization Ratio:
The asset utilization ratio, also known as the sales-to-total-assets (S/TA) ratio, is often overlooked by growth investors, but it’s a crucial indicator of a company’s real growth potential. This metric reveals how effectively a company uses its assets to generate sales. Currently, Frontdoor has an S/TA ratio of 1.57, meaning it generates $1.57 in sales for every dollar in assets. This surpasses the industry average of 0.89, highlighting the company’s efficient asset utilization. Beyond efficient sales generation, sales growth is also critical. Frontdoor’s sales are projected to grow by 3% this year, exceeding the industry average of 1.1%, further solidifying its attractive growth potential.
Promising Earnings Estimate Revisions:
The trend in earnings estimate revisions can further validate the strength of a stock’s fundamentals. A positive trend suggests favorable market sentiment and increased confidence in the company’s future earnings prospects. Empirical research has demonstrated a strong correlation between trends in earnings estimate revisions and near-term stock price movements. Frontdoor’s current-year earnings estimates have been trending upward, with the Zacks Consensus Estimate for the current year rising by 8.3% over the past month, reflecting increasing market optimism about the company’s future profitability.
Bottom Line:
Frontdoor has earned a Growth Score of A based on various factors, including those discussed above, and it carries a Zacks Rank #1 due to positive earnings estimate revisions. This combination suggests that Frontdoor is a potential outperformer and a strong choice for growth investors seeking stocks with solid fundamentals and a clear path to future success.
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