Investors looking for a methodical way to find high-growth stocks frequently use established methods. One framework is presented in Louis Navellier's "The Little Book That Makes You Rich," which summarizes growth investing in eight basic rules. These rules concentrate on earnings momentum, sales growth, profitability gains, and sound financial condition, seeking to find companies with the possibility for above-average returns. A recent filter using this method has identified Ubiquiti Inc (NYSE:UI) as a stock that merits further review.
Fit with the "Little Book" Rules
The filter uses Navellier's eight rules as criteria, and Ubiquiti's present financial data indicate a good fit with this growth-oriented approach.
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Positive Earnings Revisions & Surprises: A central idea of the method is that analyst estimate changes and earnings surprises can indicate fundamental strength. Ubiquiti displays a 9.1% increase to the next quarter's EPS estimate over the past three months. More notably, the company has surpassed EPS estimates in all of the past four quarters, with an average surprise of 30.1%. This repeated capacity to outperform expectations points to effective operations and may lead to future estimate increases.
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Strong Sales and Earnings Growth: The method looks for companies that are clearly growing, not just profitable. Ubiquiti's growth figures are clear:
- Revenue increased 36.8% year-over-year (TTM) and 33.3% in the latest quarter.
- Earnings per share increased 87.8% year-over-year (TTM) and 61.7% in the latest quarter.
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Growing Profitability and Sound Cash Creation: Growth is most beneficial when it is profitable and cash-effective. Ubiquiti's operating margin increased by about 25.9% over the last year, showing the company is growing efficiently. Also, its free cash flow growth rose by more than 537% in the past year, giving notable financial room for new investment or returns to shareholders.
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Positive Earnings Momentum and High Returns: The method highlights increasing momentum and effective use of capital. Ubiquiti's quarterly EPS growth (61.7%) is greater than its growth rate from the same quarter a year earlier (45.6%), showing positive momentum. The company also produces a very high return on equity (ROE) of 95.6%, well above the method's required minimum and showing outstanding effectiveness in creating profits from shareholder capital.
Fundamental Condition and Valuation Background
An examination of Ubiquiti's wider fundamental picture, as described in its detailed analysis report, gives more background. The company receives a good total fundamental score of 7 out of 10, supported by high scores in profitability (8) and financial condition (9).
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Profitability and Condition Advantages: Ubiquiti's profitability ratios are notable characteristics, with Return on Assets (53.1%), Return on Equity (95.6%), and Return on Invested Capital (86.6%) placed at the highest level of its Communications Equipment industry. The company also holds a solid balance sheet with no debt and a high Altman-Z score, pointing to very low default risk.
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Growth and Valuation Points: While past growth has been good, analyst projections for future yearly EPS and revenue growth are in the mid-single digits, indicating a possible slowdown. This meets with valuation, which seems high. The stock trades at a P/E ratio of 44.7 and a forward P/E of 42.0, which is costly compared to the wider S&P 500, though closer to its industry group. The high present valuation suggests that much of the company's remarkable recent growth may already be included in its stock price.
Conclusion
For investors using a method like Navellier's, Ubiquiti Inc offers an interesting example. The company meets the important requirements of strong earnings surprises, increasing sales and profit growth, growing margins, and top-level returns on equity. Its flawless balance sheet provides an element of financial security. However, the investment argument is weighed against a high valuation and reduced future growth projections, which may demand a greater level of belief in the company's ability to maintain its competitive position and profitability.
Find Other Possible Stocks The filter that found Ubiquiti is built on a specific, rules-based method. Investors curious about examining other stocks that currently meet this "Little Book" filter can see the complete list of results here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented should not be the sole basis for any investment decision. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
