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Growth stocks are attractive to many investors, as above-average financial growth helps these stocks easily grab the market's attention and produce exceptional returns. But finding a great growth stock is not easy at all.
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 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.
Our proprietary system currently recommends MTU Aero Engines AG (MTUAY) 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.
Here are three of the most important factors that make the stock of this company a great growth pick right now.
Earnings Growth
Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.
While the historical EPS growth rate for MTU Aero Engines is 16.6%, investors should actually focus on the projected growth. The company's EPS is expected to grow 14.3% this year, crushing the industry average, which calls for EPS growth of 13.2%.
Cash Flow Growth
While cash is the lifeblood of any business, higher-than-average cash flow growth is more important and beneficial for growth-oriented companies than for mature companies. That's because, growth in cash flow enables these companies to expand their businesses without depending on expensive outside funds.
Right now, year-over-year cash flow growth for MTU Aero Engines is 38.6%, which is higher than many of its peers. In fact, the rate compares to the industry average of 9.3%.
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 4.6% over the past 3-5 years versus the industry average of 2.2%.