Investors are always looking for methods to find companies with high growth potential before the wider market notices. One organized method is described in Louis Navellier’s The Little Book That Makes You Rich, which summarizes growth investing into eight important fundamental rules. The method aims to find businesses showing increasing financial momentum using measures like earnings revisions, sales growth, margin improvement, and good returns on equity. A recent filter using these ideas has identified an interesting prospect in the mining sector: New Gold Inc (NYSEARCA:NGD).
A Good Fit for the Growth Filter
New Gold’s latest financial results match well with many of Navellier’s main rules, indicating a company in a significant operational improvement. The filter’s rules are made to detect early signals of good momentum, and NGD’s present measures give a distinct sign.
Good Earnings Revisions and Surprises A key part of the method is that increases in analyst estimates frequently come before more good results. New Gold fits this, with the average EPS estimate for the next quarter increasing by more than 10% in the past three months. Even better, the company has not only met but greatly surpassed expectations, reporting positive earnings surprises in each of the past four quarters, with an average beat of 47%. This repeated capacity to do better than predictions is a good sign of operational performance and management’s careful guidance, a quality highly regarded by growth investors.
Very High Sales and Earnings Growth The filter needs solid and increasing growth. New Gold meets this with outstanding figures:
- Revenue Growth (Year-over-Year): +44.2%
- Revenue Growth (Quarter-over-Quarter): +83.5%
- EPS Growth (Year-over-Year): +309.1%
- EPS Growth (Quarter-over-Quarter): +212.5%
This increase is important. The company’s present quarterly EPS growth of 212.5% is much higher than the growth rate from the same quarter a year before (166.7%), meeting Navellier’s rule for positive earnings momentum. Such very high growth, especially in earnings, is a main reason for growth stock price increases.
Improving Profitability and Good Cash Creation Increasing sales is one part; turning it into higher profitability and cash is another. New Gold shows it is achieving both. The company’s operating margin has improved greatly, rising by about 195% over the past year. This shows the company is not just selling more, but doing so more effectively. Also, its free cash flow—important for supporting growth and lowering debt—has risen by almost 389% in the past year, meeting the "Strong Cash Flow" rule.
High Return on Equity Lastly, the method looks for effective capital users. New Gold’s Return on Equity (ROE) of 20.1% is much higher than the filter’s 10% minimum and is in the top group of its industry. A high ROE shows the company’s ability to create significant profits from the equity shareholders have invested, a key sign of quality for a growth company.
Fundamental Condition and Valuation Background
Beyond the specific filter rules, an examination of New Gold’s wider fundamental picture gives important background. According to its detailed fundamental analysis report, the company gets a good total rating of 6 out of 10. Its notable strong points are in Profitability and Growth, where it scores a 7 and 8, in order. The company has industry-leading margins and notable returns on assets and invested capital.
The Valuation score of 7 shows an interesting situation. While the trailing P/E ratio seems high, the forward P/E ratio of 11.01 and a low PEG ratio indicate the stock could be fairly valued when its high expected earnings growth rate of more than 77% for the next year is considered. This mix of high growth and fair forward valuation can be appealing.
Points for investor focus are in the Financial Health score of 3. The company’s solvency, shown by a good Altman-Z score, is not a worry. However, liquidity measures like the current and quick ratios are low compared to industry peers, showing the capital-heavy aspect of the mining business. This is a typical industry feature but stays a point to watch.
Is New Gold a "Little Book" Prospect?
Based on the numerical rules from Louis Navellier’s method, New Gold Inc makes an interesting case. It meets the requirements for very high sales and earnings increase, positive analyst opinion, improving margins, solid cash flow creation, and high returns on capital. These are exactly the early momentum signs the "Little Book" method aims to find.
For investors wanting to examine other companies that currently pass this strict growth filter, the prepared filter set is ready to use and adjust: View the "Little Book" Growth Screen on ChartMill.
It is important to note that any filtering tool is a beginning for more study. While the measures show good recent performance, the mining sector changes with cycles and is affected by commodity price changes. Investors should think about the company’s specific operational view, debt situation, and wider market conditions before making any investment choice.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any securities. Investors should do their own study and talk with a qualified financial advisor before making any investment decisions.
