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3 Reasons Why Growth Investors Shouldn't Overlook Mellanox (MLNX)

Zacks Equity Research

Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market's attention and deliver solid returns. But finding a growth stock that can live up to its true potential can be a tough task.

In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing from a stock whose growth story is actually over or nearing its end.

However, it's pretty easy to find cutting-edge growth stocks 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 Mellanox (MLNX) 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 semiconductor company a great growth pick right now.

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 Mellanox is 38.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 29.6% this year, crushing the industry average, which calls for EPS growth of -15.7%.

Cash Flow Growth

Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies. That's because, high cash accumulation enables these companies to undertake new projects without raising expensive outside funds.

Right now, year-over-year cash flow growth for Mellanox is 105.7%, which is higher than many of its peers. In fact, the rate compares to the industry average of 2.5%.

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 58.3% over the past 3-5 years versus the industry average of 13.5%.

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 Mellanox. The Zacks Consensus Estimate for the current year has surged 3.7% over the past month.

Bottom Line

Mellanox has not only earned a Growth Score of A based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #2 because of the positive earnings estimate revisions.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination indicates that Mellanox is a potential outperformer and a solid choice for growth investors.


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