Growth investing methods often look for companies showing not just present performance, but increasing speed in important financial measures. One organized method for this is described in Louis Navellier's "The Little Book That Makes You Rich," which lists eight basic rules for choosing better growth stocks. These rules center on good earnings changes and surprises, speeding sales and earnings increases, widening profitability, solid cash flow, and high returns on equity. The aim is to locate businesses where the core financial machine is working very well, pointing to possibility for continued better performance.
A recent filter using these ideas has identified Palomar Holdings Inc (NASDAQ:PLMR) as a stock needing more study. The California-based specialty insurer seems to match well with many of Navellier's main rules, offering an interesting profile for investors centered on basic growth.
Match with the "Little Book" Rules
A check of Palomar's latest financial results shows how it reaches particular levels from the filtering method:
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Good Earnings Changes & Surprises: Analysts have increased their earnings per share (EPS) forecast for Palomar's next quarter by 4.01% over the past three months. This higher change is a good sign, often meaning that analysts have become more sure about short-term outlook based on new data. Also, the company has a flawless history of beating forecasts, reporting positive EPS surprises in every one of its past four quarterly results, with an average beat of 15.33%. Steady better performance can make the market keep reassessing a company's worth.
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Solid and Speeding Increase: The filter needs firm, and preferably speeding, increase in both sales and earnings. Palomar achieves this clearly.
- Revenue increased 52.27% year-over-year and 43.90% quarter-over-quarter.
- EPS increase is even more marked, up 52.99% year-over-year and 63.41% quarter-over-quarter.
- Importantly, the present quarterly EPS increase of 63.41% is much greater than the 33.70% increase from the same quarter a year before, showing positive earnings speed, a main rule in the method that looks for speeding up rather than slowing down.
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Widening Profitability and Solid Cash Creation: For a growth narrative to last, revenue increase must turn into better bottom-line efficiency. Palomar's operating margin increased by 6.38% over the last year, showing the company is becoming more profitable as it gets bigger. At the same time, its free cash flow, the crucial money for running and growth without outside funding, jumped by 89.39% over the last year, meeting the "Solid Cash Flow" rule.
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High Return on Equity: The last rule stresses efficient use of shareholder money. Palomar's return on equity (ROE) is 20.03%, which is much above the 10% lowest level set in the filter and places it with the top in its field. A high ROE indicates management is skilled at creating profits from the equity investors have placed in the company.
Basic Condition and Value Setting
Beyond the specific filter rules, a wider view of Palomar's basic profile, as explained in its detailed analysis report, gives more setting. The company gets a firm total basic rating of 6 out of 10. Its biggest strengths are in outstanding Profitability and Growth measures, where it gets an 8 and 9 out of 10, in that order. The report notes field-leading profit margins and the very firm past and expected future increase in both revenue and earnings.
The Value score is a more average 4, suggesting the stock is not obviously low-priced compared to some field peers, trading at a P/E ratio near 17.94. However, the report states that when growth is considered through the PEG ratio, the value seems more acceptable, and the higher price may be warranted by the company's superb profitability and growth path. The Financial Condition score of 4 shows a clear balance sheet with no debt, a notable positive, balanced by comments on value loss based on return on invested capital figures and a past of share count rises.
A First Step for More Study
It is key to see that a filtering model is a first step for finding stocks, not a final buy sign. The "Little Book" method is made to find companies displaying a strong mix of basic speed qualities. Palomar Holdings, with its fast growth rates, widening margins, solid cash flow, and high ROE, clearly matches the type this method aims to find.
For investors wanting to study other companies that presently pass this strict set of growth filters, the filter is open to the public. You can see all present results and change the rules based on your own study here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or a bid or request to buy or sell any securities. The study is based on data and a filtering way described here; past results are not a guide for future outcomes. Investors should do their own study and talk with a registered financial advisor before making any investment choices.
