I recently shared several reasons why I think that it makes sense to focus on out-of-favor growth stocks. I want to share some examples of companies that appear to have strong attributes but that have performed poorly over the past year. Using Baseline and focusing on the Russell 2000 stocks with market caps in excess of $300mm, here are the constraints I applied:
- Positive earnings
- 4-quarter sales growth > 8%
- 3-year sales growth rate > 10%
- 1-year price change <10%
- 1-year price change >-25%
- Projected 2013 EPS > 10%
- Next Year EPS 6-month Revisions < -4%
- Forward PE > 14
- PE vs. 5yr Average < 1X
My parameters are designed to find companies with strong sales growth and strong projected EPS growth but where the estimates have been lowered (i.e. explaining perhaps the poor price performance). I focused only on stocks with above-average PEs, and some may find this to be a potential error in my thinking. I believe that some lower PE stocks may fit the bill, but I am assuming that if the PE is below average, then it's unlikely that the long-term growth potential is that great. Here are the 19 stocks that met these criteria:
Before I proceed, let me remind everyone that these aren't recommendations but rather ideas to consider. Always do your own DD. With that said, I will look at each of the 7 out of 10 sectors that made the cut and share a few thoughts.
The names are sorted by forward PE within economic sectors. I have highlighted a few columns. All of the companies in green in the fifth column have net cash on the books. All of the stocks in green in the 7th column are beating the market over the past three years. I tend to think that these might qualify as "fallen angels", while those in sharp decline over the past three years certainly merit more scrutiny. In the eighth column, I highlighted in red the stocks off to a poor start in 2013, lagging the S&P 500 by 5% or more. One stock, in green, is up by more than 5% above the S&P 500's return. Finally, several of the stocks have very high short-interests, a factor that also demands further scrutiny in my view but perhaps an opportunity.
There are 2 Consumer Discretionary names. I mentioned GenTherm (THRM) at year-end, when I approached this whole theme slightly differently, calling out some growth stocks "getting no respect". This company was formerly Amerigon and makes heated and cooled seats for automobiles as well as other applications. They completed a transformative acquisition last year without diluting shareholders in my view. This is one I intend to research further.
Lufkin (LUFK) is on my 100-stock watchlist, and I have been on the sidelines as their execution has been poor. It seems to be a big beneficiary of oil drilling in certain shale formations where pressure pumping is required. Kodiak (KOG) is a Bakken play I believe. It showed up on a recent screen I shared discussing rapidly growing oil & gas producers when I cited potential in this sector, though I am actually a bit cautious on commodity prices.
I will pass on the Financials, as I don't know them well enough. On the surface, Cohen & Steers (CNS) sure looks interesting, though, given its position in the popular REIT industry. With that said, in a year where Financials ruled the market, it's price action is disturbing.
I am familiar with all but the last one in the Health sector. Volcano (VOLC) is also on my watchlist, and I follow it for one of my clients which owns it. The company has a lot of promise with its technology, but it has disappointed in several regards. One issue that doesn't bother me so much is that they have some exposure to Chinese Telecom, and it has been pounded (but offers a potential rebound). The other more so: EPS isn't important apparently. The company has just done some more acquisitions - not reflected fully in the data above perhaps. It has some litigation issues as well.
Luminex (LMNX) and Masimo (MASI) are in my Top 20 Model Portfolio. LMNX has done some smart acquisitions in my view. Their numbers have been hurt by a change in buying patterns from a major customer, but this is now behind them. Still, there have been a couple of disappointments. One was the apparent evaporation of a major, major catalyst, Bio-Threat, a anthrax-detection program that might have doubled sales. Second, 2012 did see softness in demand outside of the issue I described.
MASI was recently the target of a short-report issued by Off Wall Street right as the year began, and I haven't seen it but believe it relates to slowing it its core market of pulse oximetry. The numbers here mask good growth, though the growth actually was a bit below expectations. First, they have done some dilutive acquisitions. Second, there is the 2.3% medical device excise tax. From a longer-term perspective, they have endured a royalty reduction from Covidien (COV) that has really hit earnings over the past few years. The current agreement runs out relatively soon. I assume in my valuation assumptions that they go away, but this may be too conservative. I have hit my three-link maximum, so I will leave it to you to find what I have shared publicly previously.
Lots of Industrials ... This is an area which should be perhaps the best source of ideas. A big theme here is that smaller companies are benefiting from their ability to penetrate emerging markets, and that driver stalled last year for many companies. The export theme benefits indirectly some of these companies as well. Raven Industries (RAVN), another stock I wrote about last year, is one I finally added to my Top 20 Model Portfolio in November. We actually increased the position slightly on 1/11, as I noticed it is lagging some of its Ag-focused peers. This one has a single analyst following it, a real potential hidden gem.
Finally, the Tech sector has four names. While I have looked at all of them at some point, it is only Cardtronics (CATM) that I have reviewed recently. The company owns and operates its own ATMS and services those of others. It was hit hard in Q4 on a disclosure regarding the negative impact of interchange fee reductions. This company has relatively new management and has executed very well. Sapient (SAPE) seems worth a look too.
So, hopefully I have shared some interesting ideas. As I shared in the accompanying article, stocks that can grow more rapidly than expected can benefit both from the growth as well as multiple expansion. I gave an example of how modestly higher future estimates and slight PE expansion can lead to very large price returns. I certainly think that the three stocks I mentioned in my Top 20 Model Portfolio offer that potential outcome.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.LMNX, MASI and RAVN are all held in one or more model portfolios managed by the author at Invest By Model.