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 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 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 Ultrapar Participacoes S.A. (UGP) 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 company is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings Growth
Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. 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 Ultrapar Participacoes is 29.9%, investors should actually focus on the projected growth. The company's EPS is expected to grow 58.6% this year, crushing the industry average, which calls for EPS growth of 10.9%.
Impressive Asset Utilization Ratio
Asset utilization ratio -- also known as sales-to-total-assets (S/TA) ratio -- is often overlooked by investors, but it is an important indicator in growth investing. This metric exhibits how efficiently a firm is utilizing its assets to generate sales.
Right now, Ultrapar Participacoes has an S/TA ratio of 3.22, which means that the company gets $3.22 in sales for each dollar in assets. Comparing this to the industry average of 0.31, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Ultrapar Participacoes is well positioned from a sales growth perspective too. The company's sales are expected to grow 48.1% this year versus the industry average of 5.2%.
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.
The current-year earnings estimates for Ultrapar Participacoes have been revising upward. The Zacks Consensus Estimate for the current year has surged 15% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Ultrapar Participacoes a Zacks Rank #2 stock, it has earned itself a Growth Score of A based on a number of factors, including the ones discussed above.
This combination positions Ultrapar Participacoes well for outperformance, so growth investors may want to bet on it.
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