Growth investing methods often aim to find companies with strong and quickening financial performance. One organized method for this is described in Louis Navellier's "The Little Book That Makes You Rich," which lists eight basic rules for choosing excellent growth stocks. These rules center on earnings revisions, surprises, sales and earnings growth, margin improvement, cash flow health, earnings speed, and high returns on equity. The aim is to locate businesses not only expanding, but doing so with rising efficiency and profit, frequently before Wall Street anticipates it.
A recent filter using Navellier's approach has found Five Below, Inc. (NASDAQ:FIVE) as a possible choice. The specialty value retailer, recognized for its on-trend products costing $5 and less, seems to match many of the method's central principles.
Matching the "Little Book" Standards
The filter's settings turn Navellier's eight rules into particular numerical limits. Five Below's recent financial results show it passing many of these tests, which are made to indicate a company in a strong growth period.
- Positive Earnings Revisions: Analysts have greatly increased their short-term forecasts. The average estimate for Five Below's next quarter earnings per share (EPS) has been moved up by more than 99% in the past three months. This is a vital sign in Navellier's system, as upward revisions often come before positive earnings surprises and price movement.
- Positive Earnings Surprises: The company has a flawless history of surpassing analyst predictions lately, beating EPS estimates in each of the past four quarters by an average of 53%. Steady positive surprises make the market reconsider a company's growth path, a main factor for growth stock gains.
- Rising Sales Growth: Five Below displays solid top-line increase. Revenue grew 22.9% year-over-year on a trailing twelve-month basis, and sales in the latest quarter sped up, growing 24.3% compared to the same quarter last year. Navellier notes that quickening sales growth is a sign of a winning growth company.
- Improving Operating Margin: Profitability is getting better along with sales. The company's operating margin grew by almost 15% over the last year. This improvement shows the business is growing efficiently, a rule Navellier uses to confirm growth is not hurting profitability.
- Healthy Cash Flow & Earnings Growth: The company's free cash flow jumped by 286% over the past year, giving good support for store growth and operations. Also, EPS grew 32.1% year-over-year and 23.9% quarter-over-quarter, showing solid bottom-line speed that fits the method's attention to earnings strength.
- Positive Earnings Speed: The filter needed the current quarterly EPS growth rate to be higher than the growth rate from the same quarter a year before. With current Q2Q EPS growth at 23.9%, clearly better than the -4.7% from the similar time a year ago, Five Below shows the positive earnings speed Navellier looks for.
- High Return on Equity (ROE): The company reports an ROE of 16.35%, well above the filter's 10% minimum. This measure is important as it shows management is successfully creating profits from shareholder equity, a final test for quality within a growth system.
Fundamental Condition and Price Context
Outside the specific filter standards, a wider fundamental review of Five Below shows a company with clear positives and some points to note. According to its detailed fundamental report, the company receives good scores for profitability and financial condition. Its profit and operating margins are some of the top in the specialty retail industry and have been getting better. The balance sheet is also healthy, with no debt and good liquidity measures.
The main point for investors is price. The stock sells at a high level, with a P/E ratio much higher than the wider market average. This is typical for fast-growth companies, but it does bring greater reaction to any possible growth slowdowns. The fundamental report states that while growth is predicted to stay solid, the future revenue growth rate is estimated to slow a bit from its past speed.
A Beginning for More Study
The use of Louis Navellier's filtering approach has highlighted Five Below as a company displaying many traits of a fundamental growth stock. Its solid sales and earnings speed, along with bettering margins, healthy cash flow, and a clear balance sheet, give a convincing numerical picture for growth-focused investors.
It is vital to recall that a filter gives a beginning, not a final answer. The current downward movements in the wider S&P 500, both short and long-term, highlight the need for market setting and timing for any investment choice. Investors are advised to do their own complete research.
For those wanting to look at other companies that currently pass this "Little Book" based filter, you can see all the newest results here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.