Seeking Alpha
Long only, portfolio strategy, dividend investing, ETF investing
Profile| Send Message|
( followers)  

This will be the first of two articles where I look for the best picks for 2014. In a recent article by a fellow author, one of the readers who commented on the article talked about how the author had some stock picks that had big runs this year, and that owning stocks that have had big runs was not a good strategy. I then commented on that a strategy should be based on your investment objectives rather than just a bad or good vote. Therefore for this two-part article series I will focus on my top 3 growth stock picks for 2014, and in my next article I will cover my top 3 value stocks picks for 2014.

For my search, I decided to use the suite of Pure Growth ETFs because of the unique selection process used to select the underlying holdings. The table below from Guggenheim shows that the pure growth ETFs only select the stocks, which are truly growth stocks where as traditional growth ETFs have a grey area where a stock could be considered both growth and value.

(click to enlarge)

Screening Process

I will be covering my top pick from each of the three Pure Growth ETFs covering large, mid, and small cap stocks.

Step 1: Export holdings for each growth ETF into a spreadsheet.

Step 2: Copy those holdings into the Finviz.com stock screener.

Step 3: Use the following screener criteria to screen stocks until roughly 10% of each ETFs holdings remain.

  • EPS Growth This Year: >10%
  • EPS Growth Next Year: >10%
  • EPS Growth Next 5 Years: Positive
  • PEG Ratio: < 2
  • Profit Margin: >10%
  • Price/Sales [P/S]: <10
  • ROA: >10%
  • Performance YTD: Up

Step 4: To value each stock on my final list I will be using a DCF calculator, with data for earnings and growth coming from Zacks.com, benchmark data from longrundata.com, and CPI data from the BLS. I used the following assumptions for the calculator:

  • Earnings grow for next: 5 years
  • Growth Levels off: to 1% after
  • Benchmark return: 10 yr annualized SPY return of 7.30%+1.20% inflation= 8.50% benchmark

Step 5: After step 4 is performed, I will highlight the three stocks [1 for each market cap segment] in more depth.

Large Cap Growth

The ETF I used for this selection was the Guggenheim S&P 500 Pure Growth ETF (RPG), which currently has 112 holdings. I copy and pasted the list of ticker symbols for the holdings of RPG into the Finviz screener, and used the criteria in step 3 above and ended up with 11 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is Autozone (AZO). In the table below are the results of my DCF calculations for each stock that made my final list of large cap growth stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

APH

Amphenol Inc

3.74

12.50%

81.23

86.24

-5.81%

AZO

AutoZone Inc

28.1

13.98%

647.41

463.94

39.55%

BEN

Franklin Resources Inc

3.36

13.64%

76.37

54.78

39.41%

CTSH

Cognizant Technology Solutions

3.93

17.83%

105.28

95.02

10.80%

FMC

FMC Corp

3.67

10.70%

74.14

72.64

2.06%

FOSL

Fossil Group

6.03

15.47%

147.34

119.26

23.55%

FOXA

Twenty-First Century Fox

1.44

17.41%

37.95

33.01

14.97%

ITW

Illinois Tool Works Inc

3.92

9.25%

74.65

79.6

-6.22%

PCLN

priceline.com Incorporated

37.48

19.00%

1050.38

1162.27

-9.63%

SNI

Scripps Networks Interactive

3.56

13.39%

80.12

81.63

-1.85%

TROW

T. Rowe Price Group

3.71

12.31%

79.97

80.33

-0.45%

Autozone

There are three factors that will lead Autozone to higher growth and thus a higher stock price and those factors are: Aging vehicle fleet, international expansion, and share buybacks.

  • Aging Vehicle Fleet: The chart below from Polk Research shows that the average age vehicles have been steadily rising. With consumers keeping their vehicles for a longer time-period, there is a need for automotive parts to keep the vehicles in good quality to be able to drive. Autozone operates retail stores that sell automotive parts to consumers who need parts for repairing and maintaining their vehicles, or to other businesses.

(click to enlarge)

  • International Expansion: With the growth in the middle class worldwide Autozone has started expanding into emerging markets like Mexico and Brazil. In a recent investor presentation, AutoZone noted that they currently have 362 stores in Mexico, and are growing that number by roughly 40 stores/ year. In addition, AutoZone has just started its entry into Brazil with 3 stores. As more and more consumers in these emerging markets can afford vehicles, AutoZone stands to benefit.
  • Share Repurchases: AutoZone has been the model of how a company should repurchase shares, over the last 10 years AutoZone has repurchased 57% of its shares outstanding. Going forward AutoZone will continue to repurchase shares, which will grow its EPS and even if the growth of the underlying businesses, and the valuation multiple, stays the same, shares should continue to rise.

Mid Cap Growth

The ETF I used for this selection was the Guggenheim S&P MidCap 400 Pure Growth ETF (RFG), which currently has 92 holdings. I copy and pasted the list of ticker symbols for the holdings of RFG into the Finviz screener, and used the criteria in step 3 above and ended up with 7 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is NeuStar (NSR). In the table below are the results of my DCF calculations for each stock that made my final list of mid cap growth stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

CDNS

Cadence Design Systems

0.69

15.00%

16.55

13.73

20.54%

COO

Cooper Cos.

5.95

14.33%

139.00

120.93

14.94%

NSR

NeuStar Cl A

2.97

13.33%

66.68

48.72

36.86%

RMD

ResMed Inc

2.3

13.14%

51.25

45.76

12.00%

UTHR

United Therapeutics Corporation

5.48

3.50%

82.13

86.07

-4.58%

WAB

Wabtec

2.92

14.33%

68.21

72.3

-5.66%

WDR

Waddell & Reed Financial Inc

2.71

18.10%

73.36

62.39

17.58%

Neustar

There are two factors that will lead Neustar to higher growth and thus a higher stock price and those factors are: Increased mobile phone usage, and enterprise solutions.

  • Mobile Phone Usage: Neustar provides network services for telecommunications companies, which include making sure networks, are ran the most efficient way, along with the ability to keep network data safe from the ever-increasing threat of cyber attacks.
  • Enterprise Solutions: For businesses, Neustar provides enterprise solutions, which allow companies to deliver, promote, and secure their website. Neustar can help a business by making sure their website is running efficiently, providing advertising services, and making sure the company website is protected and working properly. On a lighter note, after hearing about the poor performance of the Obamacare website, it looks like they should have considered Neustar to handle the website.

Small Cap Growth

The ETF I used for this selection was the Guggenheim S&P SmallCap 600 Pure Growth ETF (RZG), which currently has 142 holdings. I copy and pasted the list of ticker symbols for the holdings of RZG into the Finviz screener, and used the criteria in step 3 above and ended up with 13 stocks that met those criteria. Based on my DCF calculations the company that is currently the most undervalued is Questcor Pharmaceuticals (QCOR). In the table below are the results of my DCF calculations for each stock that made my final list of small cap growth stocks.

Symbol

Company

EPS

LT Growth Est

Fair Value

Current Price

% Undervalued

ACOR

Acorda Therapeutics

0.33

24.33%

11.31

30

-62.30%

ALGT

Allegiant Travel Company

4.66

16.23%

117.31

107

9.64%

CAMP

CalAmp Corp

0.6

20.00%

17.47

24.6

-28.98%

CBM

Cambrex Corp

0.93

22.80%

30.1

17.38

73.19%

DORM

Dorman Products

2.09

19.93%

60.7

54.55

11.27%

FCFS

First Cash Financial Services

2.86

15.00%

68.6

62.36

10.01%

LNN

Lindsay Corporation

5.47

13.50%

123.65

81.2

52.28%

MGAM

Multimedia Games Holding Company

1.15

20.00%

33.49

29.46

13.68%

MOV

Movado Group Inc

2.06

12.00%

43.85

43.05

1.86%

PRAA

Portfolio Recovery Associates

3.37

16.00%

84.07

51.79

62.33%

QCOR

Questcor Pharmaceuticals

4.57

28.00%

179.18

53.87

232.62%

SHOO

Steven Madden

1.93

15.00%

46.3

35.79

29.37%

SNTS

Santarus

0.97

8.00%

17.55

31.93

-45.04%

Questcor Pharmaceuticals

The major factor that will lead Questcor Pharmaceuticals to higher growth and thus a higher stock price is increased sales of its flagship product Acthar, which is approved for 19 different indications.

  • Acthar: According to a recent investor presentation, sales of Acthar have grown from $88 million in 2009 to a total of $717 in the last 4 quarters. The chart below from the investor presentations shows that even though Acthar has grown extremely fast the last 5 years, there is potential because Acthar has barely penetrated the market for many of the indications Acthar is approved. With Questcor focusing on building awareness about Acthar with patients, there is potentially much more growth in shares of Questcor.

(click to enlarge)

Closing Thoughts

In closing, I believe all three of the stocks I found are quality growth stocks, which are undervalued, and have strong underlying trends that will continue to support continued growth in 2014. In addition, I believe the final lists for each market cap segment are a good place to start to find quality growth names based how you value a stock because not every person values a stock the same way. In my next article, I will be repeating the same process but will be focusing on value stocks.

Disclaimer

Source: My 2014 Growth Stock Picks