Power Solutions International (NASDAQ:PSIX) Emerges as a Top Affordable Growth Stock

For investors looking to balance the search for growth with a degree of caution, the "Growth at a Reasonable Price" (GARP) or "Affordable Growth" strategy offers a practical middle path. This method focuses on companies that are showing solid expansion but are not priced at extreme levels, seeking to sidestep the high risk of speculative growth stocks while still seeking gains. A primary instrument for finding these companies is a fundamental stock screener that assesses businesses across five important areas: Growth, Valuation, Health, Profitability, and Dividend. By selecting for stocks with high growth marks, good profitability and financial condition, and moderate valuations, investors can methodically find possible choices that mix momentum with steadiness.

One stock recently identified by this Affordable Growth screen is Power Solutions International (NASDAQ:PSIX), a designer and maker of power systems and electrical power generation equipment. According to the fundamental analysis report from ChartMill, PSIX receives an overall fundamental rating of 7 out of 10, with especially high marks in the areas most important to the GARP idea. This picture indicates a company that is not only increasing its earnings at a notable rate but is doing so from a state of financial soundness and at a price that does not seem high.

Examining Growth and Valuation

The center of the Affordable Growth strategy depends on finding companies where solid growth is not already completely reflected in the stock price. PSIX's fundamental report shows it performs well on both points.

Growth Path:

• Past Earnings Growth: The company has shown strong recent momentum, with Earnings Per Share (EPS) increasing by 150% over the last year. Its average yearly EPS growth over recent years is a notable 51.27%.
• Future Expectations: This solid growth is estimated to persist. Analysts predict EPS to grow by about 46.10% yearly in the next few years, while revenue is projected to rise by almost 25% per year.
• Growth Change: Importantly, the report notes that the revenue growth rate is speeding up, indicating the company's expansion could be building more force.

Moderate Valuation Multiples: Even with this active growth picture, PSIX trades at prices that are viewed as moderate, even low, compared to its industry and the wider market. This is a vital test for the Affordable Growth screen, as a highly priced stock can cancel out the advantages of solid growth.

• The stock's Price/Earnings (P/E) ratio of 13.4 is much lower than the industry average of 36.7 and the S&P 500 average of 27.2, making it less expensive than over 92% of similar companies in the Electrical Equipment sector.
• Its Price/Forward Earnings ratio of 12.04 shows a similar situation, priced more moderately than 93% of industry rivals.
• Other measures like Enterprise Value to EBITDA and Price/Free Cash Flow also indicate the stock is valued at a lower level than much of its industry.

Supporting Fundamentals: Profitability and Financial Condition

For growth to be lasting and "affordable," it must be built on a firm base. The Affordable Growth screen needs adequate scores in Profitability and Financial Condition to sort out financially weak companies or those using cash quickly to support growth. PSIX scores an 8 out of 10 in both groups, offering that necessary base.

Profitability Quality: The company's ability to turn revenue into profit is very good. Key profitability ratios are some of the highest in its industry:

• Return on Invested Capital (ROIC): At 27.37%, PSIX's ROIC is better than 100% of its industry peers, showing very effective use of capital to produce profits.
• Return on Equity (ROE) and Return on Assets (ROA): At 74.60% and 26.41% respectively, these measures also place in the highest group of the industry.
• Increasing Margins: Both its Operating Margin (16.38%) and Profit Margin (17.94%) are above industry averages and have been rising over recent years.

Financial Condition Review: A company with significant debt can be hazardous, particularly when interest rates rise. PSIX's health score shows a strong balance sheet.

• Solvency: The company has an Altman-Z score of 6.07, indicating low near-term bankruptcy risk and performing better than over 83% of its industry. Its debt-to-free-cash-flow ratio of 1.87 is very good, meaning it could pay off all its debt in less than two years with its present cash flow.
• Liquidity: With a Current Ratio of 2.28, the company has more than enough short-term assets to meet its short-term obligations.

Is PSIX a Leading GARP Choice?

Power Solutions International shows an example of the kind of profile sought by Affordable Growth investing. It displays very high earnings growth and positive forward estimates, meeting the "growth" part. At the same time, its valuation multiples trade at a clear lower price than its industry and the wider market, meeting the "reasonable price" or "affordable" part. Importantly, this growth is backed by high-level profitability measures and a financially sound balance sheet, lowering the chance that the expansion is unstable or supported by too much debt.

The company's complete fundamental analysis report, which lists every score and measure, can be seen here.

For investors wanting to find other companies that match this careful growth strategy, the Affordable Growth screen that found PSIX can be a beginning. You can look for more possible choices by visiting the ChartMill stock screener.

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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. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.