Growth investing methods often focus on finding companies with steady and quickening financial momentum. One organized method is described by investor Louis Navellier in his book, The Little Book That Makes You Rich, which lists eight basic rules for choosing excellent growth stocks. These rules center on favorable earnings adjustments and surprises, quickening sales and earnings increases, rising profitability, solid cash flow, and large returns on equity. The aim is to find businesses that are not only increasing in size, but are doing so with greater effectiveness and surpassing market forecasts.
A recent filter using this system has identified Comfort Systems USA Inc (NYSE:FIX) as a stock for more detailed review. The company, a top supplier of mechanical and electrical contracting services in the United States, seems to match well with many of Navellier's central ideas.
Match with the "Little Book" Rules
The filter uses particular, measurable criteria drawn from Navellier's eight rules. This is how Comfort Systems USA measures against these important growth measures:
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Favorable Earnings Adjustments: A central part of the method is that upward adjustments by analysts frequently point to fundamental strength. FIX shows a 15.96% rise in the average EPS estimate for the next quarter over the past three months, easily passing the filter's 4% requirement. This indicates analysts are becoming more confident in the company's short-term profit path.
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Favorable Earnings Surprises: Regularly surpassing forecasts can lead analysts to update their models, possibly causing future estimate changes and stock price movement. FIX has posted four straight favorable EPS surprises in its last four quarterly results, with an average surprise of 32.63%. This outstanding history of beating estimates is a solid positive indicator.
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Quickening Sales and Earnings Increases: The method looks for companies where growth is not only happening, but speeding up. FIX shows notable momentum here:
- Sales increased 29.52% year-over-year and a notable 41.67% quarter-over-quarter.
- Even more notable is the earnings speed increase. EPS jumped 129.10% in the latest quarter compared to the same time last year, a large rise from the 60.39% increase recorded in the similar quarter a year before. This clear speed increase in profit growth is a main idea of Navellier's momentum-centered method.
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Rising Profitability (Operating Margin): It is important that sales growth leads to higher profitability, showing operational effectiveness and pricing strength. FIX's operating margin grew by 35.79% over the last year, showing the company is turning its solid revenue gains into profits at a faster pace.
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Solid Cash Flow Increase: Lasting growth is backed by solid cash creation. FIX's free cash flow increased by 39.77% over the past year, giving the financial ability to fund operations, put money into growth, or give money back to shareholders without heavy need for outside funding.
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Large Return on Equity (ROE): This measure shows how well a company creates profits from shareholder equity. FIX has an ROE of 41.76%, which is not only far above the method's 10% minimum but also places in the high end of its industry, pointing to very effective use of investor money.
Fundamental Condition and Valuation Setting
Beyond the specific filter rules, a wider view of Comfort Systems USA's fundamentals shows a solid financial picture. The company receives a high total fundamental score, with special scores in profitability and financial condition. Its return on invested capital is large, and it keeps a very careful balance sheet with little debt use.
However, this quality and growth have a cost. The stock sells at a high valuation, with a P/E ratio much higher than the wider market average. This is common for fast-growth companies and shows the market's belief that current growth rates will persist. Investors need to balance the company's outstanding operational momentum against its high valuation.
For a detailed look at these fundamental items, you can see the complete Fundamental Analysis Report for FIX.
A First Step for More Study
Comfort Systems USA Inc offers a relevant example of a company currently meeting a strict, rules-based growth filter. Its match with measures focused on earnings momentum, surprise, speed increase, and large returns on capital makes it a pertinent stock for investors using methods like those in The Little Book That Makes You Rich.
It is key to note that a filter result is a first step for more detailed investigation, not a final instruction to buy. The present market setting, where the S&P 500's long-term direction is positive but its short-term direction is neutral, calls for thoughtful review of entry timing and total portfolio suitability.
Interested in reviewing other companies that currently meet these growth rules? You can see and adjust the live filter results based on Louis Navellier's "Little Book" method here.
Disclaimer: This article is for information and learning only. It is not meant as investment guidance, a suggestion to buy or sell any security, or a statement of any kind about the future results of Comfort Systems USA Inc. All investing has risk, including the possible loss of the original amount invested. You should do your own study and talk with a qualified financial advisor before making any investment choices.