U.S. Markets closed

3 Reasons Why Growth Investors Shouldn't Overlook Melco (MLCO)

Zacks Equity Research

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.

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 Melco Resorts (MLCO) 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.

While there are numerous reasons why the stock of this casino company is a great growth pick right now, we have highlighted three of the most important factors below:

Earnings Growth

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. 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 Melco is 3.3%, investors should actually focus on the projected growth. The company's EPS is expected to grow 15.7% this year, crushing the industry average, which calls for EPS growth of 10.4%.

Impressive Asset Utilization Ratio

Asset utilization ratio -- also known as sales-to-total-assets (S/TA) ratio -- is often overlooked by investors, but it is an important indicator in growth investing. This metric shows how efficiently a firm is utilizing its assets to generate sales.

Right now, Melco has an S/TA ratio of 0.6, which means that the company gets $0.6 in sales for each dollar in assets. Comparing this to the industry average of 0.46, it can be said that the company is more efficient.

In addition to efficiency in generating sales, sales growth plays an important role. And Melco looks attractive from a sales growth perspective as well. The company's sales are expected to grow 8.7% this year versus the industry average of 5.1%.

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.

There have been upward revisions in current-year earnings estimates for Melco. The Zacks Consensus Estimate for the current year has surged 11.7% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Melco 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 Melco well for outperformance, so growth investors may want to bet on it.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Melco Resorts & Entertainment Limited (MLCO) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research