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3 Reasons Why Alphabet (GOOGL) Is a Great Growth Stock

Alphabet (GOOGL) 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. However, it isn't easy to find a great growth stock.

- 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 task of finding cutting-edge growth stocks is made easy 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.

Alphabet (GOOGL) 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.

Here are three of the most important factors that make the stock of this internet search leader 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 Alphabet is 26.5%, investors should actually focus on the projected growth. The company's EPS is expected to grow 84% this year, crushing the industry average, which calls for EPS growth of 43.9%.

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 shows how efficiently a firm is utilizing its assets to generate sales.

Right now, Alphabet has an S/TA ratio of 0.72, which means that the company gets $0.72 in sales for each dollar in assets. Comparing this to the industry average of 0.51, 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 Alphabet looks attractive from a sales growth perspective as well. The company's sales are expected to grow 39.8% this year versus the industry average of 6.3%.

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 Alphabet have been revising upward. The Zacks Consensus Estimate for the current year has surged 5.9% over the past month.

Bottom Line

While the overall earnings estimate revisions have made Alphabet 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 Alphabet is a potential outperformer and a solid choice for growth investors.



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