One of the methods I use to shortlist companies for research is to screen for companies that lead their respective industries not only in terms of growth rates, but also in operational and performance metrics like operating margins and return on equity. Further, so as to not overpay for growth, I restrict my research to companies sporting a PEG ratio less than 1.
The screening criteria: I restricted my search to companies with a minimum market capitalization of $100 million. I then searched for companies that reported a historical 5-year growth rate in the highest 20% of the industry and were projected to grow faster than 80% of the industry in the next 3-5 years. To screen for performance, I restricted my search to companies that were in the highest 20% with respect to the TTM operating margins and return on equity. Finally, I eliminated companies with a debt to total capital ratio greater than 0.33, and those that were trading with a PEG ratio greater than 1.
Of the 4000+ companies that trade in the U.S. stock markets, only 7 companies met this stringent screen. A brief description of the companies is presented below:
Questcor Pharmaceuticals (QCOR)
Questcor is a biopharmaceutical company whose primary product is H.P Acthar Gel, which is used for diagnosing adrenal gland function. The company has a market cap of $2.9 billion. QCOR grew its earnings at an annual rate of 40% during the past five years and is projected to increase its earnings at a similar rate during the next three to five years. This compares very favorably with the projected 11% growth rate of the industry.
The company sports an impressive return on equity of 39% and currently trades at a PEG of 0.46, which makes it a deep value play. My initial price target of $51 is obtained my applying a P/E of 23 to 2012 EPS estimate of $2.2. The stock last traded at $36.5 a share.
BIDU has delivered a return of 965% during the last five years by increasing its earnings at an annual rate of 143%. Going forward, analysts expect the company to grow at an annual rate of 48%. BIDU has a return on equity of 55% and operating margins of 53%. The stock is by far the largest company on the list with a market cap of approximately $46 billion. Applying a P/E of 50 to the low end of 2012 EPS estimate of $3.88, my price target of $194 is obtained.
Higher One Holdings (ONE)
Higher One Holdings is a provider of comprehensive suite of disbursement and payment solutions to the higher education industry. The $958 million company by market capitalization grew its earnings at an annual rate of 31% during the last five years and is projected to grow at a very respectable growth rate of 27% compared with the 12% growth rate of the industry. The company trades at a PEG of 0.86. Applying a P/E of 24 to EPS estimate of 2012 EPS $0.96, my price target of $23 is obtained. The stock currently trades at $17 a share and appears to be significantly undervalued.
51job, Inc. (JOBS)
51job provides integrated human resource services in China. It earns the majority of its revenue in the form of fees paid by employers for placing job advertisements in its print publication and on its website. The company has a return on equity of 19% (the lowest on this list). This zero debt company is projected to grow at an annual rate of 22% during the next three to five years compared with the 17% growth rate in the industry.
The stock currently trades at approximately $48 a share. Applying a multiple of 22 to 2012 EPS estimate of $2.56, my price target of $56 is obtained. Although the stock trades at a discount, it does not appear to be as attractive as some other names on this list.
Gulfport Energy (GPOR)
Gulfport Energy is an independent oil and natural gas exploration and production company primarily in operation in Louisiana, Colorado, and Texas. GPOR has been a great investment for its shareholders with the stock gaining approximately 200% during the last five years on an annual EPS growth rate of 26%. Going ahead, analysts expect the company to increase its EPS at an annual rate of 48%. My price target of $39 is obtained by applying a P/E of 15 to 2012 EPS estimate of $2.56. The stock currently trades at $34 a share.
Body Central Corp (BODY)
BODY is a young women's apparel and accessories retailer operating primarily in the South, Mid-Atlantic and Midwest regions of the USA. This $430 million company by market cap grew its earnings at an annual rate of 61% during the last five years. Going ahead, analysts expect the company to grow at a more down to earth rate of 20%. The industry has a projected 15% growth rate. BODY also sports a very respectable return on equity of 24%. Applying a P/E of 20 to 2012 EPS estimate of $1.5, my price target of $30 a share is obtained. A 11% return is possible from current levels of $27 a share.
Crocs Inc. (CROX)
Crocs designs, manufactures, distributes and markets footwear and accessories for men, women and children. The stock had an incredible run during 2006 and 2007 with the stock climbing from $12 a share in June 2006, to $69 a share in October 2007. The ensuing crash brought the stock down to almost a dollar. The company and the stock have since recovered. CROX currently trades at $19.31 a share. Analysts expect the company to grow its earnings at an annual rate of 25% similar to the historical growth rate. The company's ROE is also 25%.
The company is slightly undervalued at current levels. My price target of $22 is obtained by applying a P/E of 15 to 2012 EPS estimate of $1.46.
As always, please do not consider this list as a "buy" list, rather use this list as a starting point for your research. Of the companies listed above, I find BIDU, ONE, and QCOR particularly attractive based on fundamentals and growth prospects.