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. However, it isn’t easy to find a great growth stock.
By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company’s growth story is over or nearing its end, betting on it could lead to significant loss.
However, 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, makes it pretty easy to find cutting-edge growth stocks.
Synopsys (SNPS) is one such stock that our proprietary system currently recommends. The 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 software used to test and develop chips 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 Synopsys is 32.6%, investors should actually focus on the projected growth. The company’s EPS is expected to grow 13.8% this year, crushing the industry average, which calls for EPS growth of 2.6%.
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 Synopsys is 25.4%, which is higher than many of its peers. In fact, the rate compares to the industry average of 16%.
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 proper perspective. The company’s annualized cash flow growth rate has been 31.6% over the past 3-5 years versus the industry average of 13.9%.
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.
The current-year earnings estimates for Synopsys have been revising upward. The Zacks Consensus Estimate for the current year has surged 5.5% over the past month.
Bottom Line
While the overall earnings estimate revisions have made Synopsys 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.
You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here
.
This combination positions Synopsys well for outperformance, so growth investors may want to bet on it.
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