- 4 Tech Stocks to Trade (or Not)
- 3 Big Stocks to Trade (or Not)
- 5 Stocks Setting Up to Break Out
- 5 Dividend Stocks That Want to Pay You More
- 5 Stocks Under $10 Set to Soar
3 Stocks With Growth Potential - 21795 views
MILLBURN, N.J. (Stockpickr) -- The other day a good friend -- whom I refer to in my writings on The Street.com as “Craig the Jeweler" -- and I were discussing the difference between stocks and commodities. My opinion is that stocks have earnings, accumulate assets and pay dividends, whereas commodities have either industrial applications or social value. Craig asked me why companies stocks such as Wal-Mart (WMT) and Home Depot (HD) perform poorly? After all, he hypothesized, they are all making good money. I told him it's all about growth.
Investors tend to seek one or more of the following: value, growth and income. Growth is the furtherance of a company’s sales and net worth. Income represents the dividends that the company pays shareholders. Valuation looks at the worth of a company vs. its market price. One of the classic models of stock valuation is the discounted cash flow model, or DCF, a growth-based model that considers the present value of a company's future earnings. Another model, the dividend discount model, or DDM, values companies based on dividends per share divided by the discount rate less the dividend growth rate.
According to my peers, I am a GARP -- or growth at a reasonable price -- type of investor. That does not mean that I shun stocks with dividends, and I have many clients at LakeView Asset Management who also see out income. But my ultimate focus is on growth.
More From Stockpickr
To recognize when a company is growing -- or, conversely, when its growth slows down -- there are two important traits to be on the lookout for. I'll go over them both below, as well as several established companies with growth potential.
Typically a company starts off as a single store or factory. Wal-Mart started off as a general merchandise store in Bentonville, Ark. Semiconductor manufacturer Intel (INTC) started out with just one plant. As the company seeks out new markets, it will begin to spread out from its initial location across the country. It may do this by either expanding into nearby cities and states or strategically selecting locations for expansion.
One of my favorite growth companies over the past decade has been Dick’s Sporting Goods (DKS) -- I first purchased shares when it went public in 2002. The company started as a bait and tackle shop in 1948 in Binghamton, N.Y. By the time Dick's went public, it was operating 134 stores in 24 states.
There was plenty of opportunity for geographic growth. As of Oct. 30, 2010, the company operated 437 Dick's Sporting Goods stores in 42 states, with approximately 24.3 million square feet, as well as 79 Golf Galaxy stores in 29 states, with approximately 1.3 million square feet. Dick’s Sporting Goods, which is one of TheStreet Ratings' top-rated specialty retail stocks, has more room to grow before it becomes oversaturated in the sporting goods retail market.
With Home Depot, one of the highest-yielding retail stocks, the problem became oversaturation. Home Depot simply built too many stores, and they began to cannibalize each other. Not only did Home Depot run out of room for growth, but it was cutting into growth by feeding on itself. The stock recently showed up on a list of 10 Stocks Investors Bet Will Fail.
Now consider McDonald’s (MCD), one of the highest-yielding leisure stocks, which ran out of territory to expand to in the U.S. Normally, that would mark the end of the growth phase for the company. But for many companies and products, growth can extend beyond the 48 contiguous states. McDonald’s has and continues to seek opportunities around the world, and more than half of its sales are generated outside of the U.S. Home Depot has had some but very little success relative to McDonald’s when it comes to international expansion.
One-product companies typically experience an initial meteoric rise in sales and stock price. This is especially true for fad-like companies, which I looked at before in my Fad Stocks portfolio. An example of a classic fad company was the old America Online, or AOL, which was purchased by Time Warner (TWX) and then spun back out at as the new AOL (AOL). Another is Snapple, now part of the Dr Pepper Snapple (DPS).
AOL was the Internet darling of the tech boom years. AOL had a commanding share of the Internet service provider market, leading Time Warner to make what was one of the largest mergers (or takeovers) of all time. But AOL was a one-product company -- and that product, dial-up Internet access, was a transitory technology soon to be replaced by cable, fiber optics and wireless Internet access. In fact, Time Warner was able to provide cable Internet access through its Road Runner product and didn't need AOL. Thus, AOL failed to deliver the value or growth that Time Warner expected at the time of the merger.
Then there is Comcast (CMCSA), a well-respected cable service provider, much like Time Warner. Comcast not only delivered cable television service but also cable Internet access and telephone service. However, this is becoming a very crowded field with players such as Time Warner, Verizon (VZ) and Cablevision (CVC) all competing with each other. With most of the country now hooked up to the Internet and television by way of cable, and with telephone service migrating to wireless, Comcast was limited in its ability to grow.
What was missing from Comcast’s product lineup was content. Comcast had very little original programming. The company was for the most part a service provider. As such, it was becoming a utility rather than a growth company. So what did Comcast do? It entered into a joint venture with General Electric’s (GE) NBC Universal division. Now Comcast owns a 51% stake in NBCU, which produces and owns content from many networks, including NBC, CNBC, Bravo and USA. Furthermore, the joint venture controls Universal Studios and its related theme parks. Hence, Comcast, which was one of eight top George Soros buys in the most recently reported period, has transformed itself from a low-growth company like Cablevision into a company that can now rival the likes of Walt Disney (DIS) in terms of breadth of product.
To see these stocks in action, visit the Established Companies With Growth Potential portfolio.
-- Written by Scott Rothbort in Millburn, N.J.
At the time of writing, author was long DKS, MCD and VZ.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the founder and president of LakeView Asset Management, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of TheFinanceProfessor.com, an educational social networking site, and publisher of The LakeView Restaurant & Food Chain Report. Rothbort is also a professor of finance at Seton Hall University's Stillman School of Business.