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Looking for a Growth Stock? 3 Reasons Why Lithia Motors (LAD) is a Solid Choice

Zacks Equity Research
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Growth investors focus on stocks that are seeing above-average financial growth, as this feature helps these securities garner the market's attention and deliver solid returns. However, it isn't easy to find a great growth stock.

That's because, these stocks usually carry above-average risk and volatility. In fact, betting on a stock for which the growth story is actually over or nearing its end could lead to significant loss.

However, it's pretty easy to find cutting-edge growth stocks with the help of the Zacks Growth Style Score (part of the Zacks Style Scores system), which looks beyond the traditional growth attributes to analyze a company's real growth prospects.

Our proprietary system currently recommends Lithia Motors (LAD) as one such stock. This company not only has a favorable Growth Score, but also carries a top Zacks Rank.

Research shows that stocks carrying the best growth features consistently beat the market. And for stocks that have a combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or 2 (Buy), returns are even better.

Here are three of the most important factors that make the stock of this auto dealership chain a great growth pick right now.

Earnings Growth

Earnings growth is arguably the most important factor, as stocks exhibiting exceptionally surging profit levels tend to attract the attention of most investors. And for growth investors, double-digit earnings growth is definitely preferable, and often an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Lithia Motors is 17.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 11.7% this year, crushing the industry average, which calls for EPS growth of 11.4%.

Impressive Asset Utilization Ratio

Asset utilization ratio -- also known as sales-to-total-assets (S/TA) ratio -- is often overlooked by investors, but it is an important indicator in growth investing. This metric exhibits how efficiently a firm is utilizing its assets to generate sales.

Right now, Lithia Motors has an S/TA ratio of 2.24, which means that the company gets $2.24 in sales for each dollar in assets. Comparing this to the industry average of 1.98, it can be said that the company is more efficient.

While the level of efficiency in generating sales matters a lot, so does the sales growth of a company. And Lithia Motors is well positioned from a sales growth perspective too. The company's sales are expected to grow 4.1% this year versus the industry average of 0%.

Promising Earnings Estimate Revisions

Beyond the metrics outlined above, investors should consider the trend in earnings estimate revisions. A positive trend is a plus here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

The current-year earnings estimates for Lithia Motors have been revising upward. The Zacks Consensus Estimate for the current year has surged 8.5% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Lithia Motors a Zacks Rank #1 stock, it has earned itself a Growth Score of B based on a number of factors, including the ones discussed above.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

This combination indicates that Lithia Motors is a potential outperformer and a solid choice for growth investors.


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