3 Reasons Growth Investors Will Love Houlihan Lokey (HLI)

This story originally appeared on Zacks

Growth stocks are attractive to many investors because above-average financial growth allows these stocks to easily capture market attention and deliver exceptional returns. However, finding great growth value is not easy.

– Zacks

In addition to volatility, these stocks carry above-average risk by their very nature. Also, one could end up losing a stock whose growth story is actually over or nearing its end.

However, the task of finding leading growth stocks is made easier with the Zacks Growth Style Score (part of the Zacks Style Scores system), which goes beyond traditional growth attributes to analyze the real growth prospects of a company.

Our proprietary system currently recommends Houlihan Lokey (HLI) as one such stock. This company not only has a favorable growth score but also a top Zacks ranking.

Studies have shown that stocks with the best growth characteristics consistently outperform the market. And for stocks that have a combination of a growth score of A or B and a Zacks rank of No. 1 (strong buy) or 2 (buy), the returns are even better.

While there are plenty of reasons why this investment banking firm’s stock is a great growth pick right now, we’ve highlighted three of the most important factors below:

Profit growth

Arguably nothing is more important than earnings growth, as most investors are looking for increased earnings levels. And for growth-oriented 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 Houlihan Lokey is 23.6%, investors should actually focus on projected growth. The company’s EPS is expected to grow 49.8% this year, smashing the industry average, which forecasts EPS growth of 11.8%.

Cash flow growth

Although cash is the lifeblood of any business, above-average cash flow growth is more important and beneficial for growth-oriented businesses than for mature businesses. Indeed, the growth in cash flow allows these companies to expand their activities without depending on costly external funds.

Currently, the year-over-year cash flow growth for Houlihan Lokey is 45.8%, which is higher than most of its peers. In fact, the rate compares to the industry average of -4.3%.

While investors should actually consider current cash flow growth, it’s also worth taking a look at the historical rate to put the current reading into proper perspective. The company’s annualized cash flow growth rate has been 27.1% over the past 3-5 years, compared to an industry average of 14.3%.

Revisions to Promising Earnings Estimates

A stock’s superiority in terms of the metrics outlined above can be further validated by looking at the trend of 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 short-term stock price movements.

There have been upward revisions to current year earnings estimates for Houlihan Lokey. The Zacks consensus estimate for the current year jumped 8.8% over the past month.

Conclusion

Houlihan Lokey not only earned a growth score of A based on a number of factors, including those discussed above, but he also carries a No. 1 Zacks rank due to positive earnings estimate revisions.

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

This combination indicates that Houlihan Lokey is a potential outperformer and a solid choice for growth investors.

Zacks names ‘only one best choice for doubling up’

From thousands of stocks, 5 Zacks experts have each picked their favorite to skyrocket by +100% or more in the coming months. Of these 5, Research Director Sheraz Mian selects one to have the most explosive advantage of all.

As one investor put it, “curing and preventing hundreds of diseases…what should this market be worth?” This company could rival or surpass other recent Zacks stocks that are expected to double, such as Boston Beer Company which jumped +143.0% in just over 9 months and NVIDIA which jumped +175.9% in a year.

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