In growth investing, systematic methods can aid investors in finding companies with prospects for major capital gains. A specific technique is presented in Louis Navellier’s The Little Book That Makes You Rich, which simplifies the choice process into eight main rules centered on earnings momentum, sales increases, and rising profitability. The approach looks for stocks displaying positive earnings revisions and surprises, faster sales and earnings increases, widening operating margins, good cash flow production, and a high return on equity. A recent filter using these ideas has identified Guidewire Software Inc (NYSE:GWRE) as a stock for more detailed review.
Fitting the "Little Book" Rules
An assessment of Guidewire's latest financial results indicates good correspondence with Navellier's growth filters. The company's measurements for many of the eight rules are especially notable:
-
Positive Earnings Revisions & Surprises: Analysts have increased their EPS forecast for the coming quarter by more than 15% in the past three months, a main sign of rising confidence in short-term results. Also, Guidewire has reported a positive earnings surprise in every one of the past four quarterly statements, with an average beat of about 43%. Steady results above forecasts is a central part of the method, as it frequently leads analysts to raise future estimates, producing a constructive cycle for the stock.
-
Strong Sales and Earnings Increases: The company shows considerable top-line and bottom-line growth, passing the filter's limits.
- Revenue increased 23.7% year-over-year and 24.0% quarter-over-quarter.
- More notably, earnings per share rose 95.1% over the prior year and 129.4% against the same quarter last year.
-
Widening Profitability and Good Cash Flow: A vital part of the method is not only growth, but profitable growth of good quality. Guidewire's operating margin has widened significantly over the past year. At the same time, the company's free cash flow, an important measure of financial strength and internal funding ability, increased by a notable 187% over the same span. This implies the business is growing effectively and producing sufficient cash to fund reinvestment.
-
Positive Earnings Momentum and High ROE: The method looks for acceleration, not just increase. Guidewire's present quarterly EPS growth of 129.4% greatly exceeds the 10.9% growth it reported for the similar quarter a year earlier, showing strong positive momentum. Lastly, with a Return on Equity (ROE) of 12.5%, the company meets the filter's requirement of 10%, proving its capacity to generate good profits from shareholder equity.
Fundamental Condition and Valuation Background
ChartMill's fundamental analysis report gives GWRE a total rating of 5 out of 10. The report points out several positive attributes that back the growth story, while also mentioning points for investors to note.
- Growth & Condition: The company receives a high growth rating of 8, backed by the good historical and projected future growth in both revenue and EPS. Its financial condition rating is a sound 7, supported by very good liquidity ratios and a strong Altman-Z score, suggesting low short-term bankruptcy risk.
- Profitability & Valuation: Profitability measurements are varied but getting better, with a rating of 5. While the company has recorded positive earnings and cash flow, it has a background of occasional net income losses. The most significant point of caution is in valuation, where GWRE gets a 2. The stock sells at high earnings multiples, a common trait of software companies with high growth. The report states that while the valuation is high compared to the wider market, it is more consistent with industry competitors, and the high projected growth rate could support a higher price for some investors.
For a complete look at these measurements, you can see the full fundamental analysis report for GWRE.
Is Guidewire Suitable for Growth Investors?
Guidewire Software offers a notable example of a company satisfying a strict, rules-based growth filter. Its results across Navellier's eight rules, especially in earnings surprises, fast earnings increases, margin widening, and cash flow production, indicate it has the operational momentum that growth methods aim to identify. The company's position as a supplier of a central technology platform to the insurance industry provides a possibly stable growth path.
However, investors should balance this strong growth picture with the stock's high valuation, particularly within a market where the longer-term direction for the S&P 500 is now downward. The "Little Book" method is fundamentally concentrated on momentum and growth traits, and Guidewire displays many of them. As with any filter result, it should act as a beginning for more thorough research instead of a final signal to buy.
If you want to investigate other companies that currently meet this group of growth filters, you can locate the full, current filter here.
,
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. The information presented is based on data believed to be reliable but is not guaranteed. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.