Growth investing methods often look for companies showing increasing financial momentum, where better basic performance can lead to notable stock price gains. One organized way to find these companies is described in Louis Navellier's The Little Book That Makes You Rich, which lists eight important rules for picking leading growth stocks. These rules concentrate on favorable earnings adjustments and surprises, rising sales and earnings increases, growing profitability, good cash flow creation, and a high return on equity. A recent filter using this system has found Toast Inc-Class A (NYSE:TOST) as a company that now fits these strict conditions.
Fit with the "Little Book" Growth Rules
Toast, a seller of a cloud-based restaurant management system, seems to display the financial traits Navellier's method looks for. The filter's settings and the company's reported numbers indicate a solid fit:
- Favorable Earnings Adjustments & Surprises: A central part of the method is analyst belief. Toast shows a 4.5% rise in the next quarter's EPS estimate over the past three months. Also, the company has reported four straight favorable earnings surprises in its last four statements, with an average exceedance of 12.6%. Steady better-than-expected results pushes analysts to update their models, which can be a reason for higher prices.
- Strong and Rising Growth: The method requires good top-line increase. Toast's revenue increased 24.1% year-over-year (TTM), with quarterly sales up 22.0% from the same time last year. More significantly, earnings increase is very high and rising. Toast's quarterly EPS jumped 220.0% year-over-year, a notable rise from the 171.4% increase recorded in the similar quarter a year before. This positive earnings momentum is a main sign for growth investors.
- Growing Profitability and Cash Flow: It is not sufficient to only increase sales; a company must turn that increase into profit. Toast's operating margin has grown greatly, increasing by over 308% in the last year. At the same time, its free cash flow—an important gauge of financial strength and options—rose by 98.7%. This shows the company is growing effectively and creating the cash required to support future increase from within.
- High Return on Equity (ROE): The last rule looks for effective use of shareholder money. Toast's ROE of 16.1% exceeds the method's lowest limit of 10%, indicating the company is creating firm profits from its equity foundation.
Basic Strength and Price Context
An examination of Toast's wider basic profile gives background for these growth measures. According to a full basic review, the company receives a total score of 6 out of 10. The review points out outstanding financial strength, with a clean balance sheet having no debt and good liquidity measures. Its profitability, while displaying very good returns on assets and invested capital, is noted for presently moderate operating margins, though these are getting better quickly as mentioned above.
The main caution is in price. With a trailing P/E ratio of 53.9, Toast is priced highly next to both its industry group and the wider S&P 500. However, this is common for fast-growth companies, and the price is partly backed by anticipated future earnings growth of over 39% each year. The PEG ratio, which includes this growth, indicates a more fair price.
A Pick for Growth-Oriented Portfolios
For investors using a method like Navellier's, Toast offers a strong example. It meets the requirements across several momentum and quality filters made to find companies in a stage of basic speed-up. The mix of good sales growth, very high and rising earnings, growing margins, and good cash flow creation matches the aim of finding "leading growth stocks."
It is vital to remember that such filters are a beginning for more study. The present neutral short-term direction in the wider S&P 500 also indicates that timing and general market factors should be thought about together with any stock-specific review.
Interested in reviewing other companies that pass this growth filter? You can see and adjust the live screening template based on The Little Book That Makes You Rich method here.
Disclaimer: This article is for information only and does not make financial guidance, a suggestion, or an offer to buy or sell any securities. The review is based on data and a screening method described here; investors should do their own complete research and think about their personal money situation before making any investment choices.