- I have selected three growth stories trading at an attractive valuation.
- Candidates trade at less than 20 times earnings, have a strong balance sheet, report high margins and display great sales growth.
- These names can be held in any well-diversified portfolio.
In this article I will discuss three quality growth names which still trade at appealing valuations despite the huge bull run in the equity market.
The selection criteria to meet the list are a US-listing and a market capitalization of at least $2 billion. The company furthermore has to trade at less than 20 times earnings and have a PEG ratio of less than 1. Sales growth over the past five years must exceed 10% while operating margins should be north of 20%.
After applying these criteria I end up with eight names. As I prefer not to invest in financial or biotechnology names, I can exclude another four names of this list ending up with four interesting names. These are Helmerich & Payne (NYSE:HP), Syntel (NASDAQ:SYNT) and Ubiquiti Networks (NASDAQ:UBNT). The fourth one is Apple (NASDAQ:AAPL) which is covered extensively enough on SeekingAlpha among others.
Helmerich & Payne
Helmerich is focusing on contract drilling of oil and gas wells for third parties. Over the past nine years, the company has reported a nearly 21% annual growth rate in revenues which came in at $3.4 billion last year. The company is incredibly profitable, reporting after-tax earnings of twenty-two cents on each dollar of revenue. Despite the rapid growth, Helmerich has limited the dilution of the shareholder base in recent years.
Shares have already risen 68% over the past year after posting year to date gains of 26%. At $106 per share, Helmerich is currently valued at $11.5 billion which values operating assets of the business at roughly $11 billion given the net cash balances held by the firm.
The company currently trades at 15 times earnings which is quite appealing, but take notice that the company operates in a cyclical industry. When oil prices take a plunge for the worst, they tend to take stocks like Helmerich & Payne with it. For example, shares of the company lost nearly two-thirds of its value in the second half of 2008 as oil prices collapsed following the economic crisis.
That being said, the long-term prospects of the oil & gas industry remain favorable and the company appears to be well-led, showing above average growth rates in an already growing industry. For this reason, shares are worth the risk in my opinion.
Syntel provides information technology and knowledge process outsourcing solutions to many of its global customers. Over the past nine years, Syntel has reported a compounded annual growth rate of 18% as revenues increased towards $825 million over the past year.
The company reported earnings of nearly $220 million last year resulting in after-tax earnings approaching nearly twenty-seven cents on every dollar in reported revenues. Important for shareholders in growth stories, Syntel has not diluted its shareholder base while growing the business. A risk with investing in Syntel is client concentration given the limited size of the overall business, although so far the company has not experienced large customer defections in the past history.
Shares of Syntel have fallen some 11% year to date, but are up 27% over the past year. At $81 per share, Syntel is valued at $3.4 billion which includes net cash balances of $570 million.
This values operating assets of the firm at just 12-13 times annual earnings, which is quite appealing given the company's track record. While client defections could always occur, the continued growth and rock solid balance sheet combined with a modest valuation alleviates the concerns as outlined above.
Ubiquiti designs and manufactures broadband wireless solutions in a unique business model in which it does not employ sales staff. The company has been founded and continues to be led by Robert Pera, a young former Apple employee with a drive to challenge Cisco Systems (NASDAQ:CSCO).
Ubiquiti has been founded back in 2005 and has been a publicly-traded company as of late 2011. Between 2009 and 2013, Ubiquiti has reported a more than 50% compounded-annual growth rate in its revenues which approached $321 million. Growth continues with trailing revenues having surpassed the $500 million mark as of lately.
The lack of sales efforts result in incredibly strong operating margins as well. Ubiquiti posted net earnings of $80.5 million for its latest annual year resulting in impressive after-tax profit margins of 25%.
So far this year shares are down 25%, despite still posting impressive gains of 76% over the past year. At $34 per share, Ubiquiti is valued at roughly $3.0 billion, or at roughly $2.8 billion after factoring in the net cash balances held by the firm. While this values the company at 35 times annual earnings, trailing earnings have increased towards $156 million. This implies a much more attractive valuation at 18 times earnings.
Besides technological change, Ubiquiti has seen its fair share of challenges in recent times. Shares sold off aggressively in 2012 after the company suffered from counterfeit sales in China which took a toll on revenues, although the company quickly recovered from that posting new record revenues and earnings. That combined with the visionary mission of its founder Pera are comforting to me.
Implications For Investors
As discussed there are incredibly profitable and fast-growing businesses out there which trade at a fair price, despite stock markets trading at record highs.
As should be clear as well by the year-to-date performances, investing in growth stocks is a bit more risky on average although the rewards can be sizable as well. Please do your own research before investing in any of these names, which might be part of any well-diversified stock portfolio.