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. However, it isn't easy to find a great growth stock.
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.
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.
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.
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.
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.
In the past 60 days, the Zacks Consensus Estimate for 2022 earnings has been revised 0.1% upward.In light of the above-mentioned positives, we believe, investors should invest in iRobot stock now, as is suggested by its current Zacks Rank #2 (Buy).
On Aug. 5, Amazon (AMZN 3.10%) announced it was buying iRobot (IRBT 0.74%), which makes robotic vacuum cleaners including the Roomba, for $61 per share in an all-cash deal -- a 22% premium to where iRobot stock traded at the time. This acquisition news understandably overshadowed the release of iRobot's financial results for the second quarter of 2022. However, considering Q2 showed a sharp drop in revenue and profitability, perhaps this explains why iRobot is selling to Amazon at this time.
For iRobot shareholders, this is likely a disappointing finale for a stock that had so much promise, although its slight buyout premium is welcome. For Amazon, the acquisition makes a lot of sense even though it likely won't move the needle. Here's why.
Perhaps it was this slowing consumer demand that compelled iRobot to sell to Amazon at this time. Whatever the reason, it's disappointing the stock didn't perform better over its life as an independent public company.
iRobot had its initial public offering (IPO) nearly 17 years ago at $24 per share. Therefore, the $61-per-share buyout by Amazon means the stock will finish its public life up about 150%. Unfortunately for shareholders, the S&P 500 is up around 240% since iRobot went public, meaning this was a market-losing investment for many.
As of this writing, iRobot stock trades about 2.5% below Amazon's offer price. If you're looking for a low-risk way to make 2.5%, it's an arbitrage opportunity. However, for me personally, I plan to sell my iRobot shares as soon as the Motley Fool's disclosure policy allows and deploy that money elsewhere.
To be clear, I would not buy Amazon stock today because of its acquisition of iRobot. Sure, the acquisition could improve Amazon's offerings in the smart-home space, but the impact of the acquisition will likely be inconsequential when considering the size of the entire business.
That said, I do believe Amazon is a stock worth buying today because of AWS. In the first half of 2022, AWS segment revenue was almost $38.2 billion and up 35% compared to the same period of 2021 -- impressive for a business of its size. Moreover, it shows no sign of hitting a growth ceiling anytime soon and it's spitting out tons of cash flow. That's something that can work in investors' favor the longer they hold. And that's why I plan to hold my Amazon stock for years to come.
iRobot's stock isn't cheap at about 46 times next year's earnings, and the near-term headwinds should prevent it from replicating its impressive gains from last year. iRobot is still an innovative company that leads its niche market, but there simply aren't enough catalysts to make it a compelling investment right now.
The Style Scores are a complementary set of indicators to use alongside the Zacks Rank. It allows the user to better focus on the stocks that are the best fit for his or her personal trading style.
Within each Score, stocks are graded into five groups: A, B, C, D and F. As you might remember from your school days, an A, is better than a B; a B is better than a C; a C is better than a D; and a D is better than an F.
As an investor, you want to buy stocks with the highest probability of success. That means you want to buy stocks with a Zacks Rank #1 or #2, Strong Buy or Buy, which also has a Score of an A or a B in your personal trading style.
Zacks' proprietary data indicates that iRobot Corporation is currently rated as a Zacks Rank 3 and we are expecting an inline return from the IRBT shares relative to the market in the next few months. In addition, iRobot Corporation has a VGM Score of C (this is a weighted average of the individual Style Scores which allow you to focus on the stocks that best fit your personal trading style). Valuation metrics show that iRobot Corporation may be overvalued. Its Value Score of D indicates it would be a bad pick for value investors. The financial health and growth prospects of IRBT, demonstrate its potential to underperform the market. It currently has a Growth Score of A. Recent price changes and earnings estimate revisions indicate this would not be a good stock for momentum investors with a Momentum Score of D.
The ever popular one-page Snapshot reports are generated for virtually every single Zacks Ranked stock. It's packed with all of the company's key stats and salient decision making information. Including the Zacks Rank, Zacks Industry Rank, Style Scores, the Price, Consensus & Surprise chart, graphical estimate analysis and how a stocks stacks up to its peers.
The detailed multi-page Analyst report does an even deeper dive on the company's vital statistics. In addition to all of the proprietary analysis in the Snapshot, the report also visually displays the four components of the Zacks Rank (Agreement, Magnitude, Upside and Surprise); provides a comprehensive overview of the company business drivers, complete with earnings and sales charts; a recap of their last earnings report; and a bulleted list of reasons to buy or sell the stock. It also includes an industry comparison table to see how your stock compares to its expanded industry, and the S&P 500.
The Value Scorecard identifies the stocks most likely to outperform based on its valuation metrics. This list of both classic and unconventional valuation items helps separate which stocks are overvalued, rightly lowly valued, and temporarily undervalued which are poised to move higher.
The Momentum Scorecard focuses on price and earnings momentum and indicates when the timing is right to enter a stock. The analyzed items go beyond simple trend analysis. The tested combination of price performance, and earnings momentum (both actual and estimate revisions), creates a powerful timeliness indicator to help you identify stocks on the move so you know when to get in and when to get out.
The M Industry (aka Medium Sized Industry) is a subset of the of the larger Sector category, which is used to classify all of the stocks in the Zacks Universe. The Zacks database contains over 10,000 stocks. All of those stocks are classified into three groups: Sector, M Industry and X (Expanded) Industry. There are 17 Sectors, 60 different M Industries, and 265 X Industries.
For example, a regional bank would be classified in the Finance Sector. Within the Finance Sector, it would fall into the M Industry of Banks & Thrifts. And within the M Industry, it might further be delineated into the X Industry group called Banks Northeast. This allows the investor to be as broad or as specific as they want to be when selecting stocks.
The M Industry values displayed in this column are the median values for all of the stocks within their respective industry. (If an X Industry does not have at least four stocks within its group, this column will display the M Industry.) When evaluating a stock, it can be useful to compare it to its industry as a point of reference. Moreover, when comparing stocks in different industries, it can become even more important to look at the relative measures, since different stocks in different industries have different values that are considered normal.
Like the earnings yield, which shows the anticipated yield (or return) on a stock based on the earnings and the price paid, the cash yield does the same, but with cash being the numerator instead of earnings. For example, a cash/price ratio, or cash yield, of .08 suggests an 8% return or 8 cents for every $1 of investment.
Enterprise Value / Earnings Before Interest, Taxes, Depreciation and Amortization is a valuation metric used to measure a company's value and is helpful in comparing one stock to another.
Conventional wisdom says that a PEG ratio of 1 or less is considered good (at par or undervalued to its growth rate). A value greater than 1, in general, is not as good (overvalued to its growth rate). For example, a company with a P/E ratio of 25 and a growth rate of 20% would have a PEG ratio of 1.25 (25 / 20 = 1.25). A company with a P/E ratio of 40 and a growth rate of 50% would have a PEG ratio of 0.80 (40 / 50 = 0.80). Traditionally, investors would look at the stock with the lower P/E and deem it a bargain. But when compared to its growth rate, it does't have the earnings growth to justify its P/E. In this example, the one with the P/E of 40 is the better bargain because it is selling at a discount to its growth rate. So the PEG ratio tells you what you're paying for each unit of earnings growth. 59ce067264