Investors seek growth stocks to take advantage of the above-average growth of financial stocks, which helps these securities attract market attention and generate extraordinary returns. However, it is not easy to find a good growth stock.
In addition to volatility, the nature of these stocks also carries above-average risk. In addition, if the growth story of a stock is actually over or nearing its end, people may end up losing money.
However, with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), the task of finding cutting-edge growth stocks has become easier. It goes beyond traditional growth attributes and analyzes the company’s actual growth prospects.
ServiceNow (NOW) is a stock currently recommended by our proprietary system. The company not only has a good growth score, but also ranks among the best in the Zacks ranking.
Research shows that stocks with the best growth characteristics consistently outperform the market. For stocks with growth scores of A or B and Zacks Rank #1 (Strong Buy) or 2 (Buy), the return is even higher.
Although the stock of this automation company’s technology operations software maker is currently a good growth option for many reasons, we highlight the following three most important factors:
Profit growth
Earnings growth is arguably the most important factor, because stocks that exhibit abnormally soaring profit levels tend to attract the attention of most investors. For growth investors, double-digit earnings growth is absolutely desirable and usually indicates a strong prospect (and rising stock price) for the company under consideration.
Although ServiceNow’s historical earnings per share growth rate is 219.5 percent, investors should actually pay attention to the expected growth. The company’s EPS is expected to grow by 25.6% this year, exceeding the industry average, which means that EPS will grow by 16.7%.
Cash flow growth
Cash is the lifeblood of any business, but above-average cash flow growth is more beneficial and important for growth companies than for mature companies. That’s because high cash accumulation allows these companies to start new projects without raising expensive external funds.
Currently, ServiceNow’s cash flow has increased by 38.2% year-on-year, which is higher than many peers. In fact, this ratio is compared with the industry average of 8.2%.
Although investors should actually consider current cash flow growth, it is also worth looking at historical interest rates in order to put current readings in perspective. The company’s annualized cash flow growth rate for the past 3-5 years is 195.7%, while the industry average is 15.3%.
Promising earnings estimate revision
In addition to the above indicators, investors should also consider the trend of earnings forecast revisions. Positive trends are a plus here. Empirical research shows that there is a strong correlation between the trend of earnings forecast revisions and recent stock price trends.
ServiceNow’s profit forecast for this year has been revised upwards. The Zacks consensus estimate for this year has soared 1.9% in the past month.
Bottom line
Not only did ServiceNow get a B growth score based on a variety of factors (including the factors discussed above), it also earned a Zacks Rank #2 due to positive revisions to its profit forecast.
You can view the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
This combination makes ServiceNow perform well, so growth investors may want to bet on it.
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ServiceNow, Inc. (NOW): Free stock analysis report
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