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3 Reasons Why Lithia Motors (LAD) Is a Great Growth Stock

Lithia Motors (LAD) is well positioned to outperform the market, as it exhibits above-average growth in financials.

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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

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, 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, makes it pretty easy to find cutting-edge growth stocks.

Lithia Motors (LAD) 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.

Studies have shown that stocks with the best growth features consistently outperform 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. For growth investors, double-digit earnings growth is highly preferable, as it is often perceived as an indication of strong prospects (and stock price gains) for the company under consideration.

While the historical EPS growth rate for Lithia Motors is 26.1%, investors should actually focus on the projected growth. The company's EPS is expected to grow 86.2% this year, crushing the industry average, which calls for EPS growth of 77.2%.

Cash Flow Growth

Cash is the lifeblood of any business, but higher-than-average cash flow growth is more beneficial and important for growth-oriented companies than for mature companies. That's because, high cash accumulation enables these companies to undertake new projects without raising expensive outside funds.

Right now, year-over-year cash flow growth for Lithia Motors is 43.7%, which is higher than many of its peers. In fact, the rate compares to the industry average of 26.1%.

While investors should actually consider the current cash flow growth, it's worth taking a look at the historical rate too for putting the current reading into proper perspective. The company's annualized cash flow growth rate has been 19.7% over the past 3-5 years versus the industry average of 11.6%.

Promising Earnings Estimate Revisions

Superiority of a stock in terms of the metrics outlined above can be further validated by looking at the trend in earnings estimate revisions. A positive trend is of course favorable here. Empirical research shows that there is a strong correlation between trends in earnings estimate revisions and near-term stock price movements.

There have been upward revisions in current-year earnings estimates for Lithia Motors. The Zacks Consensus Estimate for the current year has surged 6.5% 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 A 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 positions Lithia Motors well for outperformance, so growth investors may want to bet on it.



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