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5 Growth Stocks at Reasonable Prices - 26219 views
MINNEAPOLIS (Stockpickr) -- There are many ways to make money in the stock market. Some investors prefer to buy stocks and hold for the long term. Others like to trade stocks for short-term profits.
Whatever your preference, investing or trading, you need to pick stocks that can be bought or traded for a profit. The many methodologies at your disposal in finding opportunities include value, growth, technical analysis or some hybrid style of investing.
It has been my experience that the hybrid approach generates the biggest bang for the buck. Specifically, I like to find stocks that are growing at a faster rate than the market currently values shares.
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Over the last decade or more, I have used this growth-at-a-reasonable-price approach to generate big gains for my stock picks. It may sound simplistic, but when a stock is growing its earnings at a rate of say 20% and yet trades for only 10 times forward earnings, the result is fairly easy to predict: The stock price will go up.
In the last two years, there have been many candidates that meet the criteria of growing quickly yet trading for a low valuation. That makes sense given investor reluctance to buy stocks and with companies seeing earnings growing quickly as they emerge from a recessionary period.
Today the pool of candidates is shrinking as valuations increase. That said, there are still plenty of stocks out there whose growth is matched with a reasonable valuation. Here are five that I would consider today .
Cabela's (CAB), which operates sporting goods stores for the avid outdoorsman, struggled in the early days of the recession and financial crisis. Its stock fell below $10 per share as consumers retreated and spending slowed.
That was then, though, and this is now. Today, Cabela's trades for more than $26 per share, and the company is looking forward to executing its growth plan. Thanks to the economic recovery, Cabela's shares have tripled in value from its lows.
Are the good times over? I don’t think so. From a valuation standpoint, Cabela's trades for a very modest 15 times trailing earnings and 13 times 2011 forward earnings.
At the moment, analysts expect the company to grow earnings by 10% in 2011, but I think those estimates are too low. The company has beaten Wall Street estimates in each of the last four quarters by as many as 19 cents per share. With the estimate for 2011 at $1.93 per share, a continuation of that trend will result in a growth rate that is above its current valuation.
With approximately 30 retail stores under operation, Cabela's has plenty of room to grow and its stock is reasonably priced.
With a B buy rating from TheStreet Ratings, Cabela's is one of the top-rated specialty retail stocks.
I really don’t understand the market's current opinion on Apple (AAPL). Considering what this company has accomplished over the last decade, one would think that shares would deserve the biggest of market premiums, but that is not the case.
Shares of Apple, despite tripling in value over the last few years, trade for a very reasonable valuation. The negatives out there will say that Apple cannot continue to grow as it has or they say that the loss of Steve Jobs will result in growth slowing. They are absolutely wrong with that assessment.
This company deserves a break when it comes to the future. It is a proven innovator not just once, but multiple times. There is no other company in the world like it. Its success comes from the whole and not just one individual.
At a price of more than $352 per share, Apple trades for about 15 times Wall Street estimates for 2011 of $22.97 per share. Analysts expect Apple to make $26.31 per share in 2012, dropping the earnings multiple to 13 times. That is a fair price to pay for that 15% earnings growth.
Over the last four quarters, Apple beat estimates by a combined $3 per share. That trend will not end in 2011. If so the valuation becomes not reasonable, but cheap. In a more risk taking environment for stocks Apple would trade for a multiple of 20 or 30 times earnings.
This stock is a no-brainer growth stock at a reasonable price.
A host of high-profile investors seem to agree with me, including George Soros' Soros Fund Management, which increased its position in Apple by 23.1% in the most-recent quarter. In fact, the stock made a recent list of 10 stocks that matter most to hedge funds. According to Scott's Investments, it's one of 40 value stocks with price momentum, and Jake Lynch included it as one of five brand-power stocks with upside.
Over the last several years, the pharmaceutical industry has been a bit of a graveyard for investors. Large pharma companies such as Merck (MRK) and Pfizer (PFE) have stagnated from a growth perspective. The action in the group is moving to the bio or genetic space.
One name that is still growing nicely and reasonably priced is Teva Pharmaceutical (TEVA). This scavenger of a company makes its money on generic drugs. While the big names spend billions on research and development with little new product to show for the effort, Teva sits back and waits for patents to expire.
When that happens, the company swoops in and makes duplicate drugs that it can sell at a lower price. That formula has worked well in the past and should continue working in the future.
Last year, Teva made $4.54 per share. At its current price of $50.10, shares trade for just 11 times trailing earnings. Analysts expect the company to make $5.10 in 2011. That gives the company a forward earnings multiple of less than 10.
With expected growth of 12%, investors can buy this stock at a relatively cheap price. The fact that the stock pays a dividend of 1.7% makes the price all the more reasonable.
Major holders of Teva include Leon Cooperman's Omega Advisors, which owns 2.1 million shares. It also showed up on lists of 10 stocks hedge funds are buying like crazy and John Paulson's 10 best new investment ideas. Teva is one of the 20 highest-yielding drug stocks.
MEMC Electronic Materials
The alternative energy space is likely to grow like weeds if oil prices stay above $100 per barrel. Although crude prices may not be sustainable at current levels, the longer term trend is higher prices. With supplies difficult to replace global economies have little choice, but to find alternatives.
One popular alternative is solar. Providing the important ingredients for solar panels is MEMC Electronic Materials (WFR). The company is a leader in the space and is growing rapidly. The same cannot be said of the stock price hence the opportunity for growth at a reasonable price investors.
Last year, MEMC generated a small profit of 15 cents per share. With that stock at $12.32 per share, MEMC trades for a hefty 82 times trailing earnings. On the surface that may seem expensive, but not when you consider earnings are expected to be $1.17 per share in 2011.
That huge amount of growth can be had for just 11 times forward earnings. For 2012, growth is expected to slow to 20%. MEMC is not just trading for a reasonable price, it is downright cheap. I’m not sure you can find a better growth story in the market at such a price and that was before oil prices surged above $100 per barrel.
There is no telling where this stock goes from here, but significantly higher would be the first place I would look.
Central Garden & Pet
Central Garden & Pet (CENT) makes and distributes a wide variety of pet and garden products for consumers. The company works with a variety of different retailers from national chains to local mom and pop shops.
Prior to the recession, shares of Central Garden traded for nearly $60 per share. The stock bottomed at just above $2 per share in late 2009. With its survival no longer in question shares zoomed back above $13 per share in early 2010, but they have been drifting lower since.
The lack of enthusiasm creates an opportunity for growth investors. Analysts expect the company to make 85 cents per share in the period ending September, 2011. That number jumps by 15% to 98 cents per share in the following year.
Investors can buy the stock today at $9.21, or about 9 times 2012 estimated earnings. I’ve had great success with stocks that trade for single digit multiples that are growing by double digits. I believe Central Garden and Pet will be another winner.
-- Written by Jamie Dlugosch in Minneapolis.
To see these stocks in action, check out the 5 Growth Stocks at Reasonable Prices portfolio.
At the time of publication, author had no positions in stocks mentioned.
Jamie Dlugosch is a founder and contributor to MainStreet Investor and MainStreet Accredited Investor. Formerly, he was president and CEO of Al Frank Asset Management. He has contributed editorially to The Rational Investor, The Prudent Speculator, Penny Stock Winners and InvestorPlace Media.