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Summary

  • Investors looking to buy growth stocks don't have to throw fundamentals and valuations out the window to buy solid growth stocks.
  • Attractive valuations can give investors downside protection.
  • In a market reaching all-time highs, there are still growth stocks with plenty of upside potential.

The market has shown recent volatility as investors try to decipher what direction the economy is heading and if stocks are reaching a peak. It has become apparent that the easy gains seen in 2013 are long gone and it has become a stock picker's market. So should you invest in value stocks for downside protection or will growth stocks remain the main market drivers? By looking for quality companies with solid fundamentals, you can get the best of both worlds. In this article, I'll profile 4 best in class stocks that have strong growth prospects but are still moderately valued and look cheap compared to the rest of the market. There are legitimate arguments that these stocks could be considered both growth and value stocks.

P/E

Fwd. P/E (12 mo)

FY '15 PE

PEG Ratio

Gilead Sciences (NASDAQ:GILD)

30

11.7

9.15

1.1

Chicago Bridge & Iron (NYSE:CBI)

16.5

14.3

13

1.12

Las Vegas Sands (NYSE:LVS)

23.7

18.5

16.6

1.65

BorgWarner (NYSE:BWA)

21.9

17.3

15.1

1.05

Source: CNBC

All 4 of these stocks are very well respected in their industries and have maintained strong growth without having their fundamentals thrown out the window as have stocks such as Netflix (NASDAQ:NFLX) or Tesla (NASDAQ:TSLA). By looking at their current and forward P/E ratios, you can make the argument that these stocks are starting to reach value territory. With the current S&P 500 P/E just over 18 and the projected forward P/E around 16, these stocks are cheap considering their growth potential over the next 3-5 years.

Gilead Sciences

EPS

Q1

Q2

Q3

Q4

FY

Y/Y % change

2013

0.48

0.5

0.52

0.55

2.05

4.6%

2014

1.48

1.59*

1.5*

1.77*

6.34*

209.3%

2015

2.14*

2.2*

2.23*

2.26*

8.83*

39.3%

Source: CNBC *Analyst consensus average

Gilead Sciences is a biopharmaceutical company that develops and commercializes medicines to treat a wide variety of illnesses. The company has a strong market position for treatments in HIV/AIDS, Hepatitis C and respiratory and cardiovascular conditions. The biggest breakthrough for the company has been the development of their new Hepatitis C treatment, Sovaldi, which will likely become the largest initial drug launch ever. The drug has drawn the ire of insurance companies and the government due to its large price tag of $1,000 per pill, or $84,000 for the 12 week treatment. However, the 12 week treatment has been so effective that it cures the patient of any symptoms and eliminates the need for further treatment down the road. While insurance companies can complain about the large price tag, they can't argue with the results and reduction in long-term costs that the breakthrough drug delivers. Sovaldi is commonly used in conjunction with a Johnson & Johnson (NYSE:JNJ) drug, Olysio, which can push the total treatment price well over $100,000. However, Gilead has also developed ledipasvir, which could eventually replace JNJ's Olysio and be used in conjunction with Sovaldi in a one pill dose. This gives the company another path to capitalize on Sovaldi.

Gilead's Drug Sales

Three months ended 3/31

($ millions)

2014

2013

Y/Y % change

Sovaldi (Hep C)

$ 2,274

--

--

Atripla (HIV)

$ 779

$ 877

-11%

Truvada (HIV)

$ 759

$ 700

8%

Complera (HIV)

$ 250

$ 148

69%

Stribild (HIV)

$ 215

$ 92

134%

Viread (Hep B)

$ 211

$ 210

0%

Letairis (pulmonary arterial hypertension)

$ 123

$ 118

4%

Ranexa (chest pain)

$ 112

$ 96

16%

Total Product Revenue

$ 4,723

$ 2,241

119%

Sovaldi delivered over $2.2 billion in its first quarter on the market, far exceeding even the most aggressive predictions. This has resulted in the company doubling revenue year-over-year. The company reported that 30,000 patients were treated with Sovaldi during the first quarter. The most impressive potential of this new drug is the vast market opportunity. According to Paul Carter, Gilead's executive vice president, it is estimated Hepatitis C afflicts up to 150 million people world-wide and an estimated 1.7 million people in the US. Currently around 400,000 patients are under treated care in the US, representing a huge opportunity for continued growth. Sovaldi is also being approved by European countries, which the company expects to drive growth as well. Analysts expect Sovaldi to bring in anywhere from $5-9 billion in sales in 2014 alone.

Most recently, Gilead passed Phase 2 trials of its Respiratory Syncytial Virus - RSV drug. GS-5806, an investigational oral RSV fusion inhibitor, achieved its primary and secondary goals of lowering viral load. RSV is a pathogen that infects the human respiratory tract and can potentially lead to bronchiolitis and pneumonia. This drug is particularly important because RSV can lead to death in infants and the elderly. Currently, there is no drug approved by the FDA for treatment. While there are other RSV drugs undergoing FDA approval, Gilead has shown that its product pipeline is vast and gives potential for added revenue streams in the future.

Gilead is one of the hottest stocks on the market right now and it is even more intriguing because of its valuations. With a forward P/E of just over 11, this stock epitomizes both value and growth. At around $81/share there is plenty of upside left in this stock. Of the 24 analysts covering the stock, there are 21 buy recommendations with an average price target around $100/share.

Chicago Bridge & Iron

EPS

Q1

Q2

Q3

Q4

FY

Y/Y % change

2013

0.82

1.04

1.12

1.19

4.17

35.8%

2014

0.87

1.27*

1.41*

1.53*

5.08

21.8%

2015

1.25*

1.42*

1.56*

1.68*

5.91

16.3%

Source: CNBC *Analyst consensus average

Chicago Bridge & Iron is a 125 year old energy infrastructure company with a focus on design, engineering, construction, fabrication and maintenance. The company has a strong presence in oil and gas projects, LNG construction, nuclear plant construction and decommissioning, clean coal and gas projects and government infrastructure.

Three months ended 3/31

($ millions)

2014

2013

Y/Y % change

Revenue

$ 2,928

$ 2,251

30.1%

Cost of revenue

$ 2,626

$ 2,005

31.0%

Gross Profit

$ 301

$ 246

22.4%

Net Income

$ 103

$ 43

139.5%

EPS (Diluted)

$ 0.82

$ 0.32

156.3%

CB&I turned in a strong quarter with revenue increasing 30% and net income increasing nearly 140%. The company recorded strength across all its business segments and booked $5.8 billion in new contracts during the quarter to put total contracted backlog at $30.7 billion. To put this into perspective, the company could not book another single contract and still has enough contracted backlog to last for over 2 years of production. This impressive backlog gives investors great insight into the company's future growth potential, making the nearly 20% forecasted EPS growth almost certain over the next 2 years.

What really stands out for CB&I and makes it attractive is the fact that they are winning contracts in the growing fields of LNG plant expansion and nuclear plant construction and decommissioning. The United States has undergone an energy transformation over the last several years to a point where exporting natural gas is seen as in the country's best interest. CB&I has taken the lead in LNG plant construction with the recently awarded $6 billion contract to construct the Cameron Liquefaction Project in Hackberry, La. The contract includes engineering, procurement and construction for the addition of natural gas liquefaction and export facilities to the existing LNG regasification facility. With Russia having the potential to cut off natural gas exports to Europe, many believe the US will move aggressively to approve LNG export facilities. With 50 years of experience in the industry and winning recent contracts, CB&I stands to benefit immensely from the US energy boom.

Another area of future growth potential for CB&I is nuclear construction and decommissioning. The company is currently partnering with Westinghouse to build the first nuclear reactor built in the US in over 30 years. But the real growth potential in the industry will be seen in China. China plans to increase nuclear capacity by 300% by 2020 and currently has 28 reactors under construction and another 58 in the planning stages. CB&I is currently constructing 4 new nuclear reactors using the Westinghouse AP1000 reactor, which will be the first in China. Of the planned 58 nuclear reactors, 20 plan to use the Westinghouse AP1000 reactor. This gives CB&I an inside track on winning future contracts in China.

CB&I is firing on all cylinders and has secured over $30 billion in future contracts. The company is the leader in all the right energy infrastructure sectors and will continue to win important contracts. Of the 4 stocks profiled in the article, CB&I may be the safest. The company has a clear growth path and a wide moat of expertise that will keep it a market leader. Any pullback in stock price should be considered an opportunity to accumulate shares. At current levels around $78, I would feel comfortable taking a position, but I will wait for a pullback and attempt to buy under $75. With an analyst consensus target value of nearly $93/share and a forward P/E value 15% lower than today's level, the stock should have no problem reaching $90 within 12 months.

Las Vegas Sands

EPS

Q1

Q2

Q3

Q4

FY

Y/Y % change

2013

0.71

0.65

0.82

0.72

2.9

35.5%

2014

0.97

0.92*

0.97*

1.06*

3.92

35.2%

2015

1.06*

1.05*

1.08*

1.15*

4.34

10.7%

Source: CNBC *Analyst consensus average

Las Vegas Sands is an integrated resort/casino operator, managing hotels and casinos in Las Vegas, Macau, Singapore and Pennsylvania. Their properties include the Venetian, Palazzo, Sands Expo Center, Sands Bethlehem and Marina Bay Sands. The company has seen robust earnings growth over the past few quarters due to the success in their Macau and Asian operations. Macau alone represents roughly 67% of their business and Asia as a whole accounted for 88% of revenue last quarter. Macau has been the primary revenue driver with quarterly revenue growing 35% year-over-year.

Three months ended

($ millions)

2014

2013

Y/Y % change

Revenue

$ 4,010

$ 3,302

21.4%

Operating Expenses

$ 2,866

$ 2,476

15.8%

Operating Income

$ 1,143

$ 827

38.2%

Net Income

$ 776

$ 572

35.7%

EPS (Diluted)

$ 0.95

$ 0.69

37.7%

Even though the company has seen amazing success in Macau, they aren't satisfied and are aggressively expanding their Sands Cotai Strip properties by investing $2.7 billion to build the Pariasian Macau and St. Regis Tower, which are both expected to open in late 2015. The expansion will increase the total hotel suites and room to nearly 13,000 on the Cotai strip.

Another area of potential growth for Las Vegas Sands is the legalization of gambling in Japan. Japan's economy is still facing serious problems and many analysts believe legalizing gambling may be inevitable to bring in additional revenue to the government. Japanese lawmakers from the ruling Liberal Democratic Party submitted a bill to legalize casinos this past December and are pushing for passage this year. If legalized, Japan could become the third largest gambling destination behind Macau and the United States, generating annual revenue over $40 billion. Las Vegas Sands believes their track record of success in Las Vegas, Singapore and Macau gives them an inside track to compete for winning these potential development opportunities.

Quarterly dividends were increased 43% to $2.00/share in May, which gives the stock a 2.7% dividend yield. In addition to the increased dividends, management has shown its commitment to the share repurchasing program by buying back $810 million in the last quarter. The company's current share repurchase program aims to buy back a minimum of $75 million every month, but will increase the buyback when management feels the stock is undervalued.

With revenue and net income increasing at steady double digits, a forward P/E of 18 and a dividend yield of 2.7%, Las Vegas Sands is a solid stock on every level. Investors get the best of both worlds by enjoying steady growth while collecting a healthy dividend. The stock has plenty of positive catalysts on the horizon to allow for significant capital appreciation in the short and long term.

BorgWarner

EPS

Q1

Q2

Q3

Q4

FY

Y/Y % change

2013

0.65

0.75

0.7

0.79

2.89

15.6%

2014

0.83

0.86*

0.79*

0.85*

3.33

15.2%

2015

0.97*

1.01*

0.94*

1*

3.92

17.7%

Source: CNBC *Analyst consensus average

BorgWarner is a global product leader in powertrain solutions aimed at improving fuel economy, emissions and performance. The company is a market leader in turbocharging, engine timing systems, boosting systems, ignition systems, air and noise management and powertrain clutching technology. BorgWarner also just completed the acquisition of Wahler, a leading producer of EGR valves, EGR tubes and thermostats. Demand for EGR technology is expected to grow as emission regulations become more stringent and drivers demand better fuel economy. This puts the company in the sweet spot in the auto parts industry as the world makes a strong push toward fuel efficiency.

(click to enlarge)

Source: Center for climate and energy solutions

As the graph illustrates, the United States isn't the only country with aggressive fuel economy goals. China, Japan and Europe all have more aggressive goals than the US and BorgWarner has a strong presence in all these areas. The company will benefit as Europe's economy emerges from recession and it expands its presence in China.

The company has the highest revenue growth rate in the auto parts industry and as a result increased its 2014 revenue and EPS outlook during last quarter's conference call. BorgWarner now expects 2014 sales growth of 12-15%, up from 7-11%, and 2014 EPS of $3.15-$3.30, up from $3.10-$3.25.

Three months ended

($ millions)

2014

2013

Y/Y % change

Revenue

$ 2,084

$ 1,851

12.6%

Cost of Sales

$ 1,638

$ 1,476

11.0%

Operating Income

$ 233

$ 198

17.7%

Net Income

$ 159

$ 142

12.0%

EPS (Diluted)

$ 0.69

$ 0.61

13.1%

As automakers look for new ways to boost fuel efficiency and improve emissions to meet government standards, companies are looking to BorgWarner's vast array of fuel saving technology. With nearly one-third of the global market share, turbocharging systems are becoming incredibly valuable to the company. BorgWarner creates turbocharging systems that allow automakers to meet current and future emission standards and achieve significant reduction in fuel consumption.

This stock won't have eye-popping revenue growth, but its low double-digit growth is consistent and it is positioned better than any other auto part manufacturer to benefit from stricter emission standards and the desire for improved fuel economy. At its current price around $61/share, I believe the stock is attractive, but I intend to wait for any pull back below $60 to establish a position. Of the 14 analysts covering the company, 9 have a buy rating and 5 list the stock as a hold. The average price target is currently $66, or 10% above its current level. This stock should be viewed as one of the safer stocks in the auto industry that should see steady, moderate gains over the long term.

Conclusion

All too often investors get bogged down trying to find the next hot stock or significantly undervalued company, when great best-in-class stocks are right there in front of their face. Gilead Sciences, Chicago Bridge & Iron, Las Vegas Sands and BorgWarner are all leaders in their industry and have significant room for growth over the next several years. What makes these stocks even more attractive is their valuations. Investors don't have to pay the ridiculous valuations for popular growth stocks like Tesla or Netflix to pick up an industry leading growth company. By having reasonable current P/E values and low forward P/E values, investors have downside protection while being able to enjoy terrific growth rates.

Source: 4 Best-In-Class Growth And Value Stocks