Revenue Growth + Sane Valuation: Making A List

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 |  Includes: AL, AMZN, CI, ESRX, FIVE, FLY, GMCR, LULU, MNK, NE, NFLX, RAX, RDC, URI, UTHR, WCG
by: YCharts

By Dee Gill

The shareholder fortunes made in companies like Amazon.com (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) can make a growth investor a bit blasé about share price valuations. After all, both those companies consistently trade at stratospheric PE ratios, but their shareholders just keep getting richer. What’s the use in calculating valuation if all the market seems to care about is revenue growth?

AMZN Chart
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AMZN data by YCharts

As an investment strategy, however, trying to peg the next Amazon is more than a little risky. Investors very often get burned when they ignore share price valuations on bets that revenue growth will be so strong, for so long, that today’s share price doesn’t matter. Time and time again, name-brand stocks trading at more than 50 times earnings have crashed to earth despite revenue growth numbers that most companies envy.

Consider, for example, the recently very expensive shares of lululemon athletica (NASDAQ:LULU) and Five Below (NASDAQ:FIVE), which have lost 24% and 37% respectively in the past three months alone.

LULU Chart
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LULU data by YCharts

Or the losses shareholders wracked up in Green Mountain Coffee Roasters (NASDAQ:GMCR) in 2011 and 2012, or the 55% in Rackspace Hosting (NYSE:RAX) in the past 12 months. Shares were trading at triple-digit forward PE ratios before their falls.

GMCR Chart
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GMCR data by YCharts

Now seems a particularly bad time to pay up for growth. The market is overdue for a correction, and high-valued stocks get particularly hard hit in that sort of selling. The less risky bets are companies with growth but not the exorbitantly-valued shares.

Despite conventional wisdom, there are many companies that fit this description now. Setting the YCharts Stock Screener to show us companies with annual revenue growth of at least 20% and forward PE ratios of between 8 and 20 gives us 323 possibilities. Boosting the market cap requirement to $500 million still brings up 247 companies.

That’s still a lot of stocks to consider. Rather that eliminate more possibilities – which we could have done by, say, excluding certain sectors or adding another benchmark requirement – we simply set the chart to show us the sector for each company, and clicked the top of that column to group sector-mates together.

The experiment shows us familiar names in almost every sector. In healthcare, we find several companies that have been popular with investors lately, including Express Scripts (NASDAQ:ESRX), Cigna (NYSE:CI), Questcor Pharmaceuticals (QCOR) and WellCare Health Plans (NYSE:WCG) and United Therapeutics (NASDAQ:UTHR).

ESRX Chart
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ESRX data by YCharts

Charting forward revenue estimates for the current and next fiscal year lets us quickly pick out the ones expected to grow respectably. Looks like Questcor, WellCare and United Therapeutics would be worth further investment research.

ESRX Sales Estimates for Current and Next Fiscal Year Chart
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ESRX Sales Estimates for Current and Next Fiscal Year data by YCharts

The energy sector is so chock full of possibilities that we add an info column to show us which industry of energy each company belongs. Under the drillers, we note Noble (NYSE:NE) and Rowan Companies (NYSE:RDC), which analysts at Credit Suisse touted as great value in a note just last week.

NE Chart
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NE data by YCharts

Plenty of other companies on this list catch our eyes. In industrials, there’s construction equipment company United Rentals (NYSE:URI), which with a 62% gain, was one of last year’s best investment stocks. In industrials, jet leasers Air Lease (NYSE:AL) and Fly Leasing (NYSE:FLY) are each projected to have enormous earnings growth over the next couple of years.

AL EBITDA Estimates for Current and Next 2 Fiscal Years Chart
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AL EBITDA Estimates for Current and Next 2 Fiscal Years data by YCharts

Disclosure: None