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3 Reasons Why Reliance Steel (RS) Is a Great Growth Stock

Reliance Steel (RS) could produce exceptional returns because of its solid growth attributes.

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This story originally appeared on Zacks

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. But finding a growth stock that can live up to its true potential can be a tough task.

- Zacks

By their very nature, these stocks carry above-average risk and volatility. Moreover, if a company's growth story is over or nearing its end, betting on it 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.

Reliance Steel (RS) is on the list of such stocks currently recommended by our proprietary system. In addition to a favorable Growth Score, it 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.

While there are numerous reasons why the stock of this metals service-center company is a great growth pick right now, we have highlighted three of the most important factors below:

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 Reliance Steel is 20.2%, investors should actually focus on the projected growth. The company's EPS is expected to grow 140.8% this year, crushing the industry average, which calls for EPS growth of 134.5%.

Impressive Asset Utilization Ratio

Growth investors often overlook asset utilization ratio, also known as sales-to-total-assets (S/TA) ratio, but it is an important feature of a real growth stock. This metric exhibits how efficiently a firm is utilizing its assets to generate sales.

Right now, Reliance Steel has an S/TA ratio of 1.25, which means that the company gets $1.25 in sales for each dollar in assets. Comparing this to the industry average of 1.12, it can be said that the company is more efficient.

In addition to efficiency in generating sales, sales growth plays an important role. And Reliance Steel looks attractive from a sales growth perspective as well. The company's sales are expected to grow 49.4% this year versus the industry average of 21%.

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 Reliance Steel have been revising upward. The Zacks Consensus Estimate for the current year has surged 0.8% over the past month.

Bottom Line

Reliance Steel has not only earned a Growth Score of B based on a number of factors, including the ones discussed above, but it also carries a Zacks Rank #2 because of the positive earnings estimate revisions.

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

This combination indicates that Reliance Steel is a potential outperformer and a solid choice for growth investors.



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