Amid a new stock market uptrend, investors should be looking for high-quality growth stocks approaching potential buy points. Don't settle for second-rate ideas. Only the best merchandise is acceptable, like Nvidia stock. An easy way to identify those well-managed companies is to check IBD's SMR (Sales + Margins + Return on equity) Rating.
Remember, it's not the chart pattern that leads to a big stock move. The chart just indicates the best time to buy. Always understand the overall fundamental story behind a company, including its earnings and sales picture. Note that those are included in the fundamental analysis pillar of The IBD Methodology.
Big Sales, Margins, Return On Equity
What helps drive big earnings growth? Excellent increases in sales, robust profit margins, a healthy return on equity — these fundamental elements matter most in determining winning stocks.
IBD's SMR Rating uses an easy-to-read A through E scale where A constitutes the top 20% of companies in terms of those metrics.
The SMR Rating can help you determine whether a company is well run. That is, does it sell a hot product or service that spurs big gains in the top line? Does the company lead its industry in profitability? And does management efficiently use resources to grow rapidly? An A or B SMR grade means the answer is likely yes, and that's what investors should be looking for when they study IBD ratings.
Of course, some terrific stocks may start their big moves despite not having an A or B. Turnaround situations may show a C grade or even lower. And if a company shows a net shareholders' deficit, no ROE can be calculated. In this case the IBD Stock Checkup will show "N/A" for the SMR grade.
Sales growth and after-tax margins are computed with quarterly figures. Return on equity and pre-tax margins are calculated using annual figures.
Nvidia Stock Fundamental Analysis
In the IBD Stock Checkup, artificial intelligence leader Nvidia boasts an A SMR Rating. Let's take a deep dive into the company's components of the SMR Rating to see the underlying strength in this company.
The SMR Rating — also found in IBD Smart NYSE + Nasdaq Tables — looks at sales growth over the past three quarters. For Nvidia stock, those three quarters encompass year-over-year increases of 206%, 265% and 262%. Outstanding sales growth alone can cause stocks to rise dramatically.
Annual pretax margin in the latest fiscal year was a strong 62%. The higher the margin, the better. Finally, the past year's return on equity was 99%. Historical models of winning stocks show they have an ROE of at least 17%.
Nvidia stock has rallied back after falling hard at the start of August. Shares are forming a new cup pattern that has a buy point at 140.76, per IBD MarketSurge chart analysis. It has recaptured both the 50-day and 10-week moving averages, a bullish sign.
Earnings are due Aug. 28 after the market close.
Be sure to follow Scott Lehtonen on X at @IBD_SLehtonen for more on growth stocks, the Dow Jones Industrial Average and the stock market today.
