Growth investing methods often look for companies with solid and quickening financial performance. One organized way to do 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 estimate changes, earnings surprises, revenue and profit increases, margin improvement, cash generation, profit speed, and return on equity. A recent filter using this system has found Lumentum Holdings Inc (NASDAQ:LITE) as a firm that now fits these strict standards.
Fit with Navellier's Growth Rules
The center of the "Little Book" method is to sort for companies displaying good speed across several financial areas. Based on the given data, Lumentum displays clear fit with many of Navellier's important rules:
- Positive Earnings Estimate Changes: Analyst opinion is a strong signal. Lumentum shows a large upward change, with the average EPS guess for the next quarter increased by 50.9% over the past three months. This implies analysts are becoming more confident in the firm's short-term earnings possibility, a main sign the method looks for.
- Positive Earnings Surprises: Regularly outperforming estimates can make analysts reconsider their models. Lumentum has posted a positive earnings surprise in every one of the past four quarters, with an average outperformance of 10.4%. This history of beating estimates is a mark of operational performance the system appreciates.
- Rising Sales Increase: Quickening income is a basic sign of demand and market share growth. Lumentum reports solid increase on both a yearly and quarterly comparison:
- Year-over-Year Revenue Increase (TTM): 48.9%
- Quarter-over-Quarter Revenue Increase: 65.5%
- Improving Operating Margin: Growing income is most useful when it becomes more profitable. Lumentum's operating margin has improved by a notable 102.2% over the last year, showing the company is growing efficiently and bettering its cost setup.
- Solid Cash Flow & Profit Increase: The company shows strong final-profit and cash creation speed:
- Free Cash Flow Increase (1Y): 69.7%
- Earnings Per Share Increase (1Y TTM): 344.2%
- Quarterly EPS Increase (Q2Q): 297.6%
- Positive Profit Speed: The method looks for quickening, not just increase. Lumentum's present quarterly EPS increase of 297.6% greatly exceeds the increase rate from the similar quarter a year earlier (31.3%), showing a major positive speed change.
- High Return on Equity (ROE): Lastly, the company creates a solid return on shareholder money, with an ROE of 29.7%, much higher than the method's lowest limit of 10%.
Basic Financial Condition and Price Context
While the "Little Book" filter centers on increase and speed measures, a wider basic study gives needed background. ChartMill's basic report for Lumentum gives a total score of 4 out of 10. The study points out a mixed view:
- Strong Points: The company scores highest in the Increase group (7/10), pushed by the large past-year and predicted future increase in both profit and income. Its Profitability is scored medium (4/10), helped by a top-level Return on Equity but pulled lower by reduced gross margins.
- Points to Consider: The report notes difficulties in Financial Condition (3/10), especially related to liquidity, with current and quick ratios under 1.0. Price (2/10) is also a noted point, with high Price-to-Earnings ratios, although a low PEG ratio implies the market could be accounting for its large predicted increase.
For a complete look at these basic parts, readers can see the full Lumentum Basic Analysis report.
Summary
For investors using a method like Navellier's, Lumentum offers an interesting example. The company now meets many of the requirements for a high-speed growth stock, displaying unusual strength in income quickening, earnings surprises, margin improvement, and analyst estimate increases. These are exactly the early financial signs the "Little Book" system is made to find. However, the wider basic analysis points out the need to look past the filter. Possible investors should balance the strong increase story against the company's present liquidity situation and high price, particularly within the setting of a market where the S&P 500's long-term direction is still down.
The "Little Book" filter is a beginning for research, not a final list to buy. Investors wanting to examine other companies that now pass this multi-part increase filter can see the complete list of findings here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a bid to buy or sell any securities. The information shown should not be the only reason for any investment choice. Investors should do their own research and talk with a qualified financial advisor before making any investment choices. Past results do not guarantee future outcomes.
