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Andy Batts
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I am an independent analyst. I offer in-depth research and analysis for small-cap undervalued stocks with significant upside potential.
  • Three High Growth Stocks For Growth Investors 1 comment
    Jun 21, 2012 12:45 PM | about stocks: CSGP, POWL, TDG

    I was looking to invest in some high growth stocks for medium to long term, with the expectation of at least 60% to 75% price appreciation from current levels. Since such stocks are highly risky, I set two criteria for selecting the companies. Firstly, the companies must have taken large steps for growth either through merger or acquisition, or by capex and adoption of new technologies, so that there is clear visibility of earnings for the next 10 to 12 quarters. Secondly, given the shaky macro economic environment, the companies must be operating and growing internationally. Based on the criteria, I found three stocks that should be a good addition to growth investors' portfolios.

    1. TransDigm Group Inc.

    Based in Cleveland, Ohio, TransDigm Group, Inc. (TDG), through subsidiaries, manufactures aircraft components for use on commercial and military aircrafts. Major competitors of the company are Goodrich Corp. (GR), Honeywell International Inc. (HON) and United Technologies Corp. (UTX).

    Transdigm acquired AmSafe Global Holdings for $750M, in January, 2012. AmSafe Global Holdings produces and sells highly engineered safety and restraint equipment used primarily in the global aerospace industry. The company stated the recent acquisition of AmSafe will significantly boost its top line and bottom line. It is also expected that the company will receive substantial tax benefits starting in 2012 as a result of the transaction.

    Just prior to the acquisition of AmSafe, the company acquired Harco Laboratories for $84M, in November, 2011. Transdigm was virtually in an acquisition spree for the last few years. The $6.22 billion company reported impressive 2012 second quarter results driven by increased sales in commercial OEM markets and aided by acquisitions of Schneller, Harco and AmSafe.

    Valuation: At $125, shares of the company are trading at a one year forward P/E of 16.42. Given the company's long-term EPS growth projection of more than 20%, the valuation looks reasonably cheap. The only concern is the company's high Debt/Equity ratio of 385%. This is only a short term concern because TransDigm's debt is a result of its expansion through acquisitions.

    2. CoStar Group Inc.

    Located in Washington D.C., CoStar Group, Inc. (CSGP) provides data and information services to the commercial real estate industries in the United States, United Kingdom and France. Major competitors of the company are Reis, Inc. (REIS) and First American Financial Corporation (FAF).

    The company completed its long awaited LoopNet acquisition on April 30, 2012. The acquisition has opened doors for massive cross-selling opportunities, new product development and penetration into new markets. The transaction also provides both revenue and cost synergies for the combined entity. With this acquisition, earnings are expected to grow at 37% in 2012 and at 55% in 2013.

    Valuation: At $78, the shares currently trade at 2.80x price-to-book. That's a 16.2% discount to the industry average of 3.34x. With a long-term EPS growth projection of more than 20% against 14.6% expected for the industry, the valuation looks reasonably cheap in relative terms.

    3. Powell Industries Inc.

    Based in Houston, Texas, Powell Industries, Inc. (POWL) is a provider of custom engineered solutions for its global clients. The company designs, manufactures and packages equipment and systems for the distribution, control, generation and management of electrical energy and other dynamic processes. Powell serves large industrial customers such as oil and gas producers, refineries, petrochemical plants, pulp and paper mills, transportation facilities, and public and private utilities.

    Powell Industries operates in Europe, the Far East, the Middle East, Africa, North America, South America, and Central America. In 2009 the company acquired PowerComm and established Powell Canada to serve the Canadian market. In 2010 the company acquired real-time thermal monitoring technology and introduced BriteSpot™ solution.

    According to I/B/E/S Estimates, analysts on an average are expecting the company to report revenue of $655 million and EPS of $1.36 for fiscal 2012, reflecting a year-on-year earnings growth of 110%.

    Valuation: At $37, shares of the company are trading at a one year forward P/E of 16.68. The price-to-sales ratio is at 0.67, compared with the peer group average of 1.25, indicating the company has huge upside potential given its growing order book and strong backlog.

    Disclosure: I am long TDG, CSGP, POWL.

    Additional disclosure: I also recommended the stocks to our clients with an eye to accumulate more in any significant correction.

    Themes: quick-picks-lists Stocks: CSGP, POWL, TDG
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Comments (1)
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  • Andy, you are a genius. I listened to your advice on POWL and it has been rising like crazy in the past weeks. It went all the way from 42 to 56+. Do you think I should lock the profit at $60 ?
    7 Feb 2013, 09:25 PM Reply Like
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