For investors looking to find companies with strong and improving business momentum, the principles in Louis Navellier's "The Little Book That Makes You Rich" provide a systematic, numbers-driven method. The approach centers on eight main rules meant to find leading growth stocks, focusing on upward earnings revisions and surprises, improving sales and earnings, widening profitability, strong cash flow, and high returns on equity. The aim is to locate firms not only expanding, but doing so at a quicker pace, which frequently comes before notable stock price gains. A recent filter using these rules has identified Lumentum Holdings Inc (NASDAQ:LITE) as a possible candidate for more detailed review.
Matching the "Little Book" Rules
An inspection of Lumentum's recent financial data shows its fit with many of Navellier's main growth filters. The company displays solid operational momentum in several areas.
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Upward Earnings Revisions & Surprises: Analyst outlook is improving, an important early sign in the method. The average EPS forecast for Lumentum's next quarter has been increased by more than 46% in the past three months. Also, the company has a consistent history of surpassing forecasts, exceeding EPS estimates in all of the last four quarters by an average above 10%.
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Improving Growth: The method favors acceleration, not just expansion. Lumentum's figures here are notable. Year-over-year EPS growth is at a high 344%, while its latest quarterly EPS rose almost 298% against the same quarter last year. Importantly, this marks a clear improvement from the 31% growth rate recorded in the similar period a year earlier, meeting the "positive earnings momentum" rule. For revenue, growth is also solid, with quarterly sales up more than 65% and yearly revenue growth close to 49%.
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Widening Profitability and Solid Cash Flow: As sales increase, the method searches for companies to turn that expansion effectively into profit and cash. Lumentum's operating margin has widened significantly, increasing more than twofold over the last year. This points to better cost control and pricing ability. At the same time, the company's free cash flow production has risen by almost 70% in the past year, giving financial room to support operations and expansion from within.
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High Return on Equity: The last rule looks for effective use of shareholder capital. Lumentum's Return on Equity (ROE) of about 30% is very high, indicating the company is producing considerable profits from the equity invested in the business.
Fundamental Condition and Valuation Background
A wider view of Lumentum's fundamental standing, as described in its detailed analysis report, shows a varied situation growth investors need to consider. The company's total fundamental rating is neutral, showing both major positives and clear points of attention.
The main positives are found directly in its growth path and profit efficiency. The large growth rates in earnings and sales, along with the high ROE, are the key points of interest for a momentum-based method. However, the report notes areas for care, especially about financial condition. The company's liquidity measures, like its current and quick ratios, are low, suggesting possible issues in meeting near-term commitments. This is a point investors need to watch.
On valuation, the situation is not simple. Common measures like the Price-to-Earnings ratio seem very high, both on their own and compared to the wider market. This is common for fast-growth companies where the market accounts for future possibility. The valuation is partly supported by the very high projected earnings growth of over 105% in the next few years, which is shown in a more moderate forward-looking PEG ratio.
Is LUMENTUM (LITE) Suitable for Growth Investors?
For an investor using the "Little Book" method, Lumentum offers a strong example. It meets many of the needed points for a growth momentum stock: high and improving earnings, increasing analyst forecasts, widening margins, and excellent returns on capital. The method is built on the view that these fundamental gains will in time be seen and valued by the market.
However, this approach does not overlook risk. The filter finds candidates based on past and expected momentum, but the following assessment is key. The issues regarding liquidity and the high valuation are not automatic reasons to avoid for a growth investor, but they do increase the risk level. Such an investment would rely on the belief that the company's strong growth phase will persist, finally bettering its balance sheet condition and supporting its present price.
The "Little Book" filter is made to discover companies showing these specific growth traits. Lumentum is one of multiple stocks that currently meet this strict filter. You can review the complete list of passing stocks and modify the filter settings yourself using the Little Book That Makes You Rich screen on ChartMill.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on data and a specific investment strategy model; past performance is not indicative of future results. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.