gRowth stocks are attractive to many investors because above average financial growth makes it easy for these stocks to grab market attention and produce exceptional returns. However, finding good growing stock is not easy.
In addition to volatility, these stocks by their very nature carry above-average risk. In addition, one could end up losing on a stock whose growth story is in fact over or nearing its end.
However, the task of finding top growth stocks is made easier with the help of the Zacks Growth Style Score (which is part of the Zacks’ style scores system), which goes beyond traditional growth attributes to analyze a company’s actual growth prospects.
Onto Innovation (ONTO) is on the list of those actions currently recommended by our proprietary system. In addition to a favorable growth score, he holds a higher Zacks rank.
Research shows that stocks with the best growth characteristics consistently beat the market. And returns are even better for stocks that have the combination of a Growth Score of A or B and a Zacks # 1 (strong buy) or 2 (buy) ranking.
While there are many reasons why this semiconductor manufacturing equipment maker’s inventory is a great growing choice right now, we’ve highlighted three of the most important factors below:
Earnings growth is arguably the most important factor, as stocks with unusually high levels of earnings tend to grab the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of a strong outlook (and stock price gains) for the company under consideration.
While the historic EPS growth rate for Onto Innovation is 15.4%, investors should actually focus on projected growth. The company’s EPS is expected to rise 93.3% this year, crushing the industry average, which calls for EPS growth of 11.5%.
Cash flow growth
Cash is the lifeblood of any business, but above-average cash flow growth is more beneficial and important for growth-oriented businesses than it is for mature businesses. Indeed, a high accumulation of liquidity allows these companies to undertake new projects without raising expensive external funds.
Right now, Onto Innovation’s year-over-year cash flow growth is 136.3%, which is higher than many of its peers. In fact, the rate compares to the industry average of -15.7%.
While investors should actually be mindful of the current growth in cash flow, it’s also worth taking a look at the historic rate to put the current reading in perspective. The annualized growth rate of the company’s cash flow has been 62.2% over the past 3-5 years, compared to an industry average of 48.2%.
Revisions to promising earnings estimates
Beyond the measures described above, investors should take into account the trend of revisions to earnings estimates. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and short-term stock price movements.
Current year profit estimates for Onto Innovation have been revised upwards. Zacks’ consensus estimate for the current year has jumped 4.8% over the past month.
Although the overall revisions to earnings estimates made Onto Innovation a stock of Zacks Rank # 2, it earned a growth score of B based on a number of factors, including those discussed below. -above.
This combination positions Onto Innovation well for outperformance, 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.