The best performing stocks in the market are usually the stocks with the highest growth rates or the highest expected growth rates. Their market prices reflect their recent strong growth and expected high growth rates. However, this does not mean that investing in today's strong growth stocks will generate high returns in the future. In fact, value stocks on average outperformed growth stocks historically. The reason is simple. Value stocks usually have low or even negative growth expectations, which is relatively easy for them to beat. On the other hand, growth stocks are usually expected to grow at higher rates. Therefore, it is much more difficult for growth stocks to beat the challenging expectations in the long term.
A good example of this is Netflix's (NFLX) more than 75% decline a few months ago. We think beaten-down stocks with low expected growth rates have higher upside potential than stocks that are expected to grow at sky-high rates.
Below, we ranked U.S. services companies based on their expected five-year growth rates. All companies have at least $20 billion market cap. The data is sourced from Finviz.
Ticker | Company | Forward P/E | EPS growth |
Wal-Mart Stores Inc. | 12.42 | 9.64% | |
Walgreen Co. | 11.36 | 10.06% | |
Carnival Corporation | 10.89 | 10.06% | |
McDonald's Corp. | 17.31 | 10.54% | |
CSX Corp. | 11.91 | 10.56% | |
CVS Caremark Corporation | 13.06 | 11.09% | |
United Parcel Service, Inc. | 15.9 | 12.14% | |
Target Corp. | 11.77 | 12.39% | |
eBay Inc. | 11.97 | 12.47% | |
Lowe's Companies Inc. | 15.14 | 12.90% | |
Yum! Brands, Inc. | 19.4 | 13.11% | |
The TJX Companies, Inc. | 15.13 | 13.15% | |
Costco Wholesale Corporation | 18.78 | 13.29% | |
Walt Disney Co. | 11.82 | 13.59% | |
The Home Depot, Inc. | 16.41 | 13.70% | |
Time Warner Inc. | 12.02 | 13.96% | |
Comcast Corporation | 14.22 | 14.11% | |
Medco Health Solutions, Inc. | 13.87 | 14.57% | |
Norfolk Southern Corp. | 12.5 | 14.92% | |
Time Warner Cable Inc. | 13.82 | 15.26% | |
VIA.B | Viacom, Inc. | 9.49 | 15.41% |
Union Pacific Corporation | 12.28 | 15.54% | |
FedEx Corporation | 12.58 | 16.38% | |
Starbucks Corporation | 21.77 | 17.65% | |
Mastercard Incorporated | 16.17 | 18.00% | |
Visa, Inc. | 14.83 | 19.27% | |
News Corp. | 11.2 | 19.54% | |
DIRECTV, Inc. | 10.17 | 22.64% | |
Amazon.com Inc. | 102.83 | 25.85% | |
priceline.com Incorporated | 17.58 | 27.02% | |
Las Vegas Sands Corp. | 19.13 | 38.84% |
Wal-Mart Stores is at the top of the list. It is expected to grow at an average of 9.64% per year in the next five years. WMT has a market cap of $209B and a relatively low forward P/E ratio of 12.42. Wal-Mart reported total revenues of $110 billion for the three months ending October 31, 2011, compared with $102 billion for the same period a year ago. It is also very popular among hedge funds. At the end of the third quarter, there were 41 hedge funds reported to own WMT in 13F portfolios. Warren Buffett is the most bullish hedge fund manager about WMT. His Berkshire Hathaway had more than $2 billion invested in WMT at the end of September. Boykin Curry, Ken Fisher, Jean-Marie Eveillard and Cliff Asness are also bullish about WMT.
Another mega-cap services stock at the top of the list is McDonald's Corp. It is estimated to grow at an average of 10.54% annually over the next five years. The company reported fourth quarter net income of $1.4 billion in 2011, up from $1.2 billion for the same quarter in 2010. Its annual net income in 2011 was $5.5 billion, compared with $4.9 billion for 2010. MCD has a market cap of $101B and a P/E ratio of 17.31. At the end of the third quarter, there were 39 hedge funds with MCD positions in their 13F portfolios. For example, Jim Simons' Renaissance Technologies had $271 million invested in MCD. Ric Dillon's Diamond Hill Capital also invested more than $100 million in this stock.
Amazon.com Inc is at the bottom of the list. It is expected to grow at an average of 25.85% annually over the next five years. As a result, it has a high P/E ratio of 102.83. The stock did not perform well recently. It lost 10.60% since the end of the third quarter, while the market was up 17.29% in the same period.
Most stocks with low expected growth rates are trading at attractive multiples. The top 10 stocks on the list above all have current P/E ratios and forward P/E ratios of lower than 20. We think investors should focus on the stocks at the top of the list and do some deep research about these stocks for their own portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
