Looking for a Growth Stock? 3 Reasons Why Adobe (ADBE) is a Solid Choice
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 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 Adobe Systems (ADBE) as one such stock. This company not only has a favorable Growth Score, but also carries a top Zacks Rank.
Studies have shown that stocks with the best growth features consistently outperform 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 software maker is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. 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 Adobe is 21.8%, investors should actually focus on the projected growth. The company's EPS is expected to grow 12.3% this year, crushing the industry average, which calls for EPS growth of 8.8%.
Impressive Asset Utilization Ratio
Growth investors often overlook asset utilization ratio, also known as sales-to-total-assets (S/TA) ratio, but it is an important feature of a real growth stock. This metric shows how efficiently a firm is utilizing its assets to generate sales.
Right now, Adobe has an S/TA ratio of 0.67, which means that the company gets $0.67 in sales for each dollar in assets. Comparing this to the industry average of 0.47, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And Adobe looks attractive from a sales growth perspective as well. The company's sales are expected to grow 9.1% this year versus the industry average of 6.7%.
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 Adobe have been revising upward. The Zacks Consensus Estimate for the current year has surged 0.6% over the past month.
While the overall earnings estimate revisions have made Adobe 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 Adobe well for outperformance, so growth investors may want to bet on it.
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