Growth stocks hold a special appeal for many investors, as their above-average financial growth often attracts market attention and generates exceptional returns. However, identifying a growth stock that lives up to its full potential can be a challenging task. By their nature, these stocks carry higher-than-average risk and volatility. Moreover, if a company’s growth story is nearing its end, investing in it can lead to significant losses. Fortunately, the Zacks Growth Style Score can simplify the search for cutting-edge growth stocks. This proprietary system analyzes a company’s true growth prospects beyond traditional growth metrics.
Currently, the Zacks Growth Style Score recommends Kontoor Brands (KTB) as a promising growth stock. Kontoor not only boasts a favorable Growth Score but also carries a top Zacks Rank. Research indicates that stocks with the best growth characteristics consistently outperform the market. Returns are even more significant for stocks that combine a Growth Score of A or B with a Zacks Rank of #1 (Strong Buy) or #2 (Buy).
Let’s delve into three crucial factors that make Kontoor Brands a compelling growth pick:
1. Earnings Growth:
For growth investors, earnings growth is paramount. Double-digit earnings growth is highly desirable as it often signals strong prospects for the company and potential stock price gains. While Kontoor’s historical earnings per share (EPS) growth rate is 12.6%, investors should focus on the projected growth. This year, the company’s EPS is expected to grow by 12.7%, surpassing the industry average of 6.7%.
2. Impressive Asset Utilization Ratio:
The asset utilization ratio, also known as the sales-to-total-assets (S/TA) ratio, is frequently overlooked by investors, but it plays a vital role in growth investing. This metric reveals how effectively a company leverages its assets to generate sales. Kontoor currently boasts an S/TA ratio of 1.57, meaning that for every dollar in assets, the company generates $1.57 in sales. Compared to the industry average of 1.15, this signifies that Kontoor operates with greater efficiency. While sales generation efficiency is crucial, a company’s sales growth is equally important. Kontoor also shines in this regard, with expected sales growth of 0.1% this year, surpassing the industry average of 0%.
3. Promising Earnings Estimate Revisions:
Further validating a stock’s strength based on the metrics mentioned above involves analyzing the trend in earnings estimate revisions. A positive trend is favorable. Empirical research demonstrates a strong correlation between earnings estimate revision trends and short-term stock price movements. For Kontoor, current-year earnings estimates have been trending upwards. The Zacks Consensus Estimate for the current year has surged by 1.5% over the past month.
Bottom Line:
Kontoor Brands’ combination of a Zacks Rank #2 (Buy) and a Growth Score of A, driven by factors like impressive earnings growth, an efficient asset utilization ratio, and positive earnings estimate revisions, positions the company for potential outperformance. Growth-focused investors may want to consider adding Kontoor to their portfolios.
