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3 Reasons Why Sonic Automotive (SAH) Is a Great Growth Stock

Sonic Automotive (SAH) could produce exceptional returns because of its solid growth attributes.

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This story originally appeared on Zacks

Growth stocks are attractive to many investors, as above-average financial growth helps these stocks easily grab the market's attention and produce exceptional returns. But finding a growth stock that can live up to its true potential can be a tough task.

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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.

Sonic Automotive (SAH) 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.

While there are numerous reasons why the stock of this auto dealer 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 Sonic Automotive is 29.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 98% this year, crushing the industry average, which calls for EPS growth of 93.1%.

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, Sonic Automotive has an S/TA ratio of 3.29, which means that the company gets $3.29 in sales for each dollar in assets. Comparing this to the industry average of 1.91, it can be said that the company is more efficient.

In addition to efficiency in generating sales, sales growth plays an important role. And Sonic Automotive looks attractive from a sales growth perspective as well. The company's sales are expected to grow 26.2% this year versus the industry average of 24.4%.

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 Sonic Automotive have been revising upward. The Zacks Consensus Estimate for the current year has surged 4.8% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Sonic Automotive a Zacks Rank #2 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 Sonic Automotive well for outperformance, so growth investors may want to bet on it.



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