In growth investing, few methods are as clear and established as the one Louis Navellier described in his 2007 book, "The Little Book That Makes You Rich." The plan is formed on eight basic rules meant to find companies displaying better growth traits. These rules center on good earnings revisions and surprises, increasing sales and earnings growth, rising profitability, solid cash flow, and a high return on equity. The aim is to methodically sort for firms that are not only expanding, but whose expansion is getting better and surpassing what the market predicts, a strong mix that frequently results in notable stock price gains. A recent filter using this plan has identified one software firm as a top prospect for more study.
Examining Guidewire Software
Guidewire Software Inc (NYSE:GWRE) offers a central technology system for the property and casualty insurance business. Its cloud and on-site products help insurance companies handle the full policy cycle, from underwriting and billing to claims. As the insurance field experiences a major shift to digital tools, Guidewire’s place as a main facilitator puts it in an increasing market segment. The firm’s latest financial results indicate it is taking advantage of this chance in a manner that matches Navellier’s growth rules well.
How Guidewire Fits the "Little Book" Rules
The filter uses Navellier’s eight rules as exact numerical checks. Guidewire’s present measurements show a good match across several important areas:
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Good Earnings Revisions & Surprises: A key part of the plan is that analysts are increasing their forecasts, often because of steady better-than-expected results. Guidewire does well here, with analysts raising next-quarter EPS estimates by almost 17% in the past three months. Also, the company has reported a positive earnings surprise in all of the last four quarters, with an average beat above 42%. This habit of beating forecasts builds trust and can push future estimate revisions up.
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Solid and Increasing Growth: The plan looks for companies where growth is not only good but building speed.
- Sales Growth: Guidewire’s revenue increased 23.7% year-over-year, and the latest quarter showed 24.0% growth compared to the year-ago quarter, easily passing the filter’s limits.
- Earnings Growth: The speed increase is even clearer in profits. Year-over-year EPS growth is a notable 95.1%. Importantly, the quarterly EPS growth rate has sped up greatly to 129.4%, much higher than the 10.9% growth from the similar quarter a year before. This positive earnings speed is a key sign for growth investors.
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Rising Profitability and Solid Cash Creation: Growth is most useful when it becomes more profitable. Guidewire’s operating margin has grown notably over the past year. More significantly, the company is turning its growth into actual cash, with free cash flow jumping by 187% over the last twelve months. This solid cash flow gives financial room to fund more expansion or improve the balance sheet.
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High Return on Equity: The last rule needs effective use of shareholder money. Guidewire’s Return on Equity (ROE) of 12.5% shows it is creating good profits from the equity put into the business, meeting the plan’s standard for efficiency.
Basic Financial Condition and Price Context
A look at Guidewire’s wider basic financial picture, as shown in its detailed analysis report, gives needed background. The company gets a good financial health score, backed by a solid balance sheet with acceptable liquidity and solvency measures. Its growth score is very good, confirming the speed found by the "Little Book" filter.
However, the price score is poor, showing a high cost. With a P/E ratio higher than both the industry and wider market averages, the market has obviously included much of Guidewire’s good growth path in the price. This is a common trait of high-growth stocks found by such filters; the investment idea depends on the company keeping up its performance and growing to justify its price, not being a cheap buy at current levels.
Is Guidewire Suitable for Growth Investors?
For an investor using Louis Navellier’s method, Guidewire Software offers a good example. It meets the marks on the numerical rules made to spot speeding, high-quality growth. The company is increasing sales quickly, its earnings growth is speeding up markedly, it is beating forecasts regularly, and its profitability and cash creation are getting better. These are precisely the patterns the "Little Book" plan aims to use.
It is key to remember that this filter is a beginning for study, not a list of buys. The present high price and the natural ups and downs of growth stocks mean this prospect may be better for investors with a greater risk acceptance and a view on long-term speed. As Navellier states, the importance of each rule can change with market environments, so continuous watching is needed.
Find Other Possible Prospects
Guidewire is only one of the firms that passed this strict growth filter. Investors wanting to use this methodical way to locate other possible growth leaders can see the complete set of results by using the ready-made "Little Book" filter on ChartMill.
Disclaimer: This article is for information and learning only. It is not a suggestion to buy, sell, or keep any security, including GWRE. All investing has risk, including the chance of losing the original money. Investors should do their own complete study and think about their personal financial position and risk comfort before making any investment choices.