Growth investing methods often look for companies showing better financial momentum and operational strength. One organized method, made famous by Louis Navellier in The Little Book That Makes You Rich, lists eight specific rules for picking these stocks. These rules center on good earnings revisions and surprises, faster sales and earnings increases, widening profitability, solid cash flow, and a high return on equity. The process tries to find firms that are not only increasing but doing so with better efficiency and market support, often before these qualities are completely seen in the stock price.
A recent filter using this method found Palomar Holdings Inc. (NASDAQ:PLMR), a specialty property and casualty insurer. The company's latest financial results indicate it matches well with many of Navellier's important growth rules.
Meeting the Growth Rules
A detailed look at Palomar's fundamentals shows how it meets the main parts of the growth filtering method.
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Positive Earnings Revisions & Surprises: Analyst opinion has improved, with the average EPS estimate for the next quarter moved higher by more than 5% in the past three months. More notably, Palomar has a flawless history of beating forecasts, surpassing analyst EPS estimates in every one of the past four quarters by an average of over 15%. Steady positive surprises are a sign of companies performing better than the market expects, often resulting in future estimate increases, a main factor for growth investors.
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Strong Sales and Earnings Growth: The company is showing forceful top and bottom-line growth, a basic need for any growth pick.
- Revenue increased 52.3% year-over-year and 43.9% quarter-over-quarter.
- Earnings per share jumped 53.0% year-over-year and 63.4% quarter-over-quarter. This shows the company's capacity to greatly raise its sales while turning that growth into even higher profits.
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Widening Profitability and Solid Cash Flow: Growth is most useful when it is profitable and creates cash. Palomar indicates it is reaching this through operating leverage and efficient capital use.
- Its operating margin grew by more than 6 percentage points in the last year, showing the company is increasing sales without equal rises in costs.
- Free cash flow, important for a flexible and sound business, rose by 89.4% over the same time.
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Positive Earnings Momentum and High ROE: The growth is not only strong, it is speeding up. The latest quarter's EPS growth of 63.4% greatly exceeds the 33.7% growth from the same quarter a year ago, showing positive earnings momentum. Also, the company achieves a very good return on equity of 20.0%, indicating it is very good at creating profits from shareholder capital.
Fundamental Condition and Valuation Setting
ChartMill's fundamental analysis report gives Palomar Holdings an overall score of 6 out of 10. The report points out a mixed but hopeful view. The company's profitability is a clear positive, scoring an 8/10, with top industry measures in return on equity, profit margin, and operating margin. Its growth picture is outstanding, scoring 9/10, backed by the forceful historical growth rates and solid analyst estimates for future growth.
The main points of care come from the financial condition score of 4/10. While the company has no debt, a notable plus, the report mentions that its return on invested capital has in the past been lower than the industry average, though it is now displaying betterment. The valuation score is neutral at 5/10. With a P/E ratio near 18, Palomar sells at a higher price than its insurance industry peers but at a lower price than the wider S&P 500. Considering its better growth path and profitability, this valuation could be reasonable for growth-focused investors, a point highlighted by its low PEG ratio.
For a full look at these measures, you can see the complete fundamental analysis report for PLMR.
A Pick for Growth-Focused Portfolios
For investors using a method like Navellier's, Palomar Holdings offers a strong case. It meets several needs for fast, high-quality growth: speeding up revenue and earnings, widening margins, solid cash creation, and positive analyst opinion. While its financial condition measures display space for betterment, its debt-free balance sheet gives a firm base. In the setting of a growth filter, PLMR shows the kind of company the method aims to find, one with strong operational momentum that may not yet be completely priced by the wider market.
This analysis came from a filter set to mirror the ideas from The Little Book That Makes You Rich. To see other companies currently passing like growth filters, you can view and change the filter here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investing involves risk, including the potential loss of principal. Always conduct your own due diligence and consider consulting with a qualified financial advisor before making any investment decisions.
