Seeking Alpha
Long/short equity, growth at reasonable price, value, deep value
Profile| Send Message|
( followers)  

Some companies keep offering large promises, but never seem to be able to deliver. The ‘big break’ is always around the corner for companies like American Oriental Bioengineering (AOB), but the ‘paycheck in the mail’ routine quickly gets old.

So to uncover a group of growth stocks worthy of further analysis, we will screen for the following:

  • Sales and earnings growth over 15% over the past 5 years

EPS growth is a major price driver. But you can boost earnings per share (or keep them high) by such things as repurchasing stock and accounting tricks like improper asset depreciation. Sustainable earnings should be made on the back of growing sales.

  • Sales and Earnings quarter over quarter growth over 15%

Just another net to make sure the growth is true in comparable quarters between years.

  • Forecasted earnings growth over the next 5 years greater than 15%

  • PEG ratio under 1

  • Country equals USA

With the recent China scandal, I felt it is prudent to stick close to home turf. The PEG ratio less than one will screen out some stocks that may be trading at too high multiples, or too young without decent earnings to back up the price. Earnings growth over 15% per year over the next five years should give us a few stocks to work with.

Growth Stock Quick Pick List

Ticker

Company

Market Cap (millions)

UCTT

Ultra Clean Holdings Inc.

232.54

NUVA

NuVasive, Inc.

1096.72

SPWRA

SunPower Corporation

1558.19

TQNT

TriQuint Semiconductor, Inc.

2091.07

NANO

Nanometrics Incorporated

373.93

ASYS

Amtech Systems Inc.

210.78

GIII

G-III Apparel Group, Ltd.

862.4

OPLK

Oplink Communications Inc.

393.82

DECK

Deckers Outdoor Corp.

3710.19

AXTI

AXT Inc.

213.56

STRI

STR Holdings, Inc.

671.63

GOOG

Google Inc.

169134.4

BLK

BlackRock, Inc.

37803.62

AAPL

Apple Inc.

325220.1

RBCN

Rubicon Technology, Inc.

658.75

DXPE

DXP Enterprises Inc.

363.66

POZN

POZEN Inc.

175.21

ENTR

Entropic Communications, Inc.

717.07

TWGP

Tower Group Inc.

924.4

AFOP

Alliance Fiber Optic Products Inc.

94.76

CPLA

Capella Education Co.

796.64

MED

Medifast Inc.

281.75

SCLN

SciClone Pharmaceuticals, Inc.

228.19

NVEC

NVE Corp.

274.56

This is a fairly diverse group of 24 stocks from big names to ones I have never heard of. Some are no doubt safer bets and others are high risk. Let's break it down.

Fama and French

Fama and French found that small value stocks outperformed large growth stocks. You can read about it in their broader and more recent case study (April 2011 draft) in the paper: Size, Value, and Momentum in International Stock Returns. Based solely on being smaller than a small cap stock and having a price to book ratio less than 2, we have five stocks:

  • SunPower Corp. (SPWRA), Oplink (NASDAQ:OPLK), AXT Inc. (NASDAQ:AXTI), Tower Group (NASDAQ:TWGP), Alliance Fiber Optic (NASDAQ:AFOP)

Momentum Returns

Momentum states that stocks outperforming over the past 3 months, 6 months, and 12 months will continue to deliver excess gains over the next 12 months. Here are the stocks with high excess gains over the corresponding periods. You can read about this in the paper called Momentum, by Narasimhan Jegadeesh and Sheridan Titman (October 2001).

  • Three months greater than 10%: G-III Apparel (NASDAQ:GIII), Deckers Outdoor (NYSE:DECK), Rubicon (NASDAQ:RBCN), DXP Enterprises (NASDAQ:DXPE), SciClone Pharma (NASDAQ:SCLN)

  • Six months greater than 30%: TriQuint Semiconductor (NASDAQ:TQNT), G-III Apparel (GIII), Deckers Outdoor (DECK), DXP Enterprises (DXPE), SciClone Pharma (SCLN)

  • 12 months greater than 50%: TriQuint Semiconductor (TQNT), Nanometrics (NASDAQ:NANO), Amtech Systems (NASDAQ:ASYS), AXT Inc. (AXTI), DXP Enterprises (DXPE), Entropic (NASDAQ:ENTR)

Picking stocks on the 12 month list had slightly higher gains than the three or six month list. Picking a stock on two or all three of the time-frames is another way to pick high momentum stocks.

Sector Performance

Over the past year and 3-month window, energy stocks have continued to dominate. However, none of these stocks are applicable to the energy sector.

The technology sector hasn’t been an extremely great performer lately, and the troubles in Japan sure didn’t help stability. But there is one industry group on our growth list that is dominating. This is the semiconductors. Should the sector come into favor, however, these stocks are poised to profit from such a move. It may not be the time to pick these stocks up now, but at a future date... maybe.

Ticker

Company

Industry

ASYS

Amtech Systems Inc.

Semiconductor Equipment & Materials

UCTT

Ultra Clean Holdings Inc.

Semiconductor - Specialized

NVEC

NVE Corp.

Semiconductor - Specialized

RBCN

Rubicon Technology, Inc.

Semiconductor - Specialized

SPWRA

SunPower Corporation

Semiconductor - Specialized

OPLK

Oplink Communications Inc.

Semiconductor - Integrated Circuits

TQNT

TriQuint Semiconductor, Inc.

Semiconductor - Integrated Circuits

AXTI

AXT Inc.

Semiconductor - Integrated Circuits

ENTR

Entropic Communications, Inc.

Semiconductor - Broad Line

A Few Other Particulars to Watch Out For

  1. Do you follow the informed buyer, such as institutions? Then be careful around Rubicon Technology as between quarters, institutions sold almost 30% of their holdings.

  2. A high percentage of the float being sold short indicates a bearish sentiment. It can turn to be a large upside, if positive information keep bringing in new buyers. The stocks with very high short percentages are: Medifast (NYSE:MED) (34.5% short), Rubicon (RBCN) (81% short), and Entropic (ENTR) (35% short). Make sure you do your due diligence when you see a large short interest.

  3. The big guns on this list are Google (NASDAQ:GOOG), and Apple (NASDAQ:AAPL). Google missed very slightly on earnings as it pours an increasing amount into research and development. Despite sales climbing ever steadily and the hidden value of R&D, this stock has taken a hit lately. The average five year growth rate is still 17.91% per year, so this has plenty of punch left. Apple has a rich history of positive earnings surprises, and with 20% growth forecast over the next five years (per annum), this keeps being a solid buy at 0.70 PEG.

So while some companies expect us to invest based on credulity, other companies have generated decent earnings and are at good valuations-- when contrasting future earning potential to current price multiples. There are some very high risk stocks here, those with negative momentum an high short interest, or those being sold off by institutions. But these could also see a rebound if they can sustain aggressive growth.

These are not sure bets and you should look beyond the price and ratio analysis here to find out the reasons behind the numbers, and if you are comfortable with such risk. While the paycheck hasn't arrived yet, these picks have at least made their way into the envelopes with a stamp on it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 24 Proven Growth Companies at Potential Bargains