Here is Why Growth Investors Should Buy American Eagle (AEO) Now
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. However, it isn't easy to find a great growth stock.
By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it could lead to significant loss.
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 American Eagle Outfitters (AEO) 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 teen clothing retailer is a great growth pick right now, we have highlighted three of the most important factors below:
Earnings Growth
Arguably nothing is more important than earnings growth, as surging profit levels is what most investors are after. 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 American Eagle is 0.7%, investors should actually focus on the projected growth. The company's EPS is expected to grow 15.2% this year, crushing the industry average, which calls for EPS growth of 7.3%.
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, American Eagle has an S/TA ratio of 1.38, which means that the company gets $1.38 in sales for each dollar in assets. Comparing this to the industry average of 1.32, it can be said that the company is more efficient.
In addition to efficiency in generating sales, sales growth plays an important role. And American Eagle is well positioned from a sales growth perspective too. The company's sales are expected to grow 1.5% this year versus the industry average of 0%.
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 American Eagle. The Zacks Consensus Estimate for the current year has surged 1.7% over the past month.
Bottom Line
American Eagle 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 positions American Eagle well for outperformance, so growth investors may want to bet on it.
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American Eagle Outfitters, Inc. (AEO) : Free Stock Analysis Report
