Much like other great rivalries - Yankees vs. Red Sox, Packers vs. Bears, Canadiens vs. Bruins - the investment world's growth vs. value battle generates strong feelings and intense, seemingly never-ending debate.
But while no self-respecting fan would ever root for both the Yankees and Red Sox, it's a different story in investing. You can - and should - embrace both growth and value in your portfolio.
While often portrayed as polar opposites, value and growth are really more like cousins. As Warren Buffett put it in his 2000 letter to Berkshire Hathaway shareholders, "Market commentators and investment managers who glibly refer to 'growth' and 'value' styles as contrasting approaches to investment are displaying their ignorance, not their sophistication. Growth is simply a component - usually a plus, sometimes a minus - in the value equation."
What Buffett understood was that the rate a company is growing is just one factor you should use to assess its value. A firm can be producing tremendous growth, but if its shares are priced sky-high, it may not be worth your attention. Conversely, a firm's shares can be dirt-cheap, but if it has no potential to grow, its stock likely isn't headed anywhere.
Just about all of the gurus whose approaches inspired the Guru Strategies I run on Validea.com embraced both growth and value metrics in their methodologies. With that in mind, I thought we'd take a look at five of the cheapest "growth" stocks - or, if you'd prefer, five of the fastest-growing "value" stocks - in the market right now.
Sanderson Farms (NASDAQ:SAFM): Mississippi-based Sanderson, founded in 1947, is engaged in the production, processing, marketing and distribution of fresh and frozen chicken and other prepared food items. It employs more than 11,000 employees in operations spanning five states and 13 different cities, and is the third-largest poultry producer in the United States.
Sanderson has grown earnings per share at a 19% pace over the long haul (using the average of the four- and five-year EPS growth rates). That helps it get strong interest from my Peter Lynch-inspired model, which also likes that the stock trades for just 7.8 times trailing 12-month EPS. Lynch famously used the P/E-to-Growth ratio to find bargain-priced growth stocks, and when we divide Sanderson's P/E by its growth rate, we get a PEG of about 0.4. That falls into this model's best-case category (below 0.5).
Sanderson's growth/value combo also impresses my Kenneth Fisher-based model, which likes its 16.6% long-term inflation-adjusted growth rate and 0.7 price/sales ratio.
ePlus Inc. (NASDAQ:PLUS): Virginia-based ePlus helps organizations optimize their IT infrastructure and supply chain processes by delivering complex information technology solutions, which include managed and professional services and products from top manufacturers, flexible financing and proprietary software. The 24-year-old firm has more than 950 associates serving commercial, state, municipal and education customers nationally.
ePlus ($540 million market cap) gets strong interest from my James O'Shaughnessy-based model. It looks for firms that have upped earnings per share in each year of the past five-year period, which ePlus has done. The model also looks for a key combination of variables: a high relative strength, which is a sign the market is embracing the stock, and a low price/sales ratio, which is a sign it hasn't gotten too pricey. ePlus has a solid 12-month relative strength of 78, and its P/S ratio of just 0.49 comes in well below this model's 1.5 upper limit.
Neenah Paper, Inc. (NYSE:NP): More than 100 years old, Neenah makes premium, specialty and sustainable papers used for premium writing, text, cover, digital and specialty needs.
Neenah ($1 billion market cap) gets strong interest from my O'Shaughnessy- and Lynch-based models. The former likes that it has upped earnings per share in each year of the past five-year period, and has a 1.1 price/sales ratio and 84 RS. The latter likes its 20% long-term EPS growth rate (using the average of the three- and four-year EPS growth rates) and 18.1 P/E, which make for a 0.9 PEG ratio (anything under 1.0 is considered a good deal).
Outerwall Inc. (NASDAQ:OUTR): This parent of Coinstar and Redbox ($1.4 billion market cap) has taken in nearly $2.3 billion in sales in the past year and grown EPS at a 50% clip over the long term (using an average of the three-, four- and five-year EPS growth rates).
The model I base on the writings of hedge fund guru Joel Greenblatt is particularly high on Outerwall. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes OUTR's 11.6% earnings yield and 50.5% ROC, which combine to make the stock the 23rd-best in the entire U.S. market right now, according to this approach.
WSFS Financial Corporation (NASDAQ:WSFS): This $720-million market cap Delaware-based firm is the seventh-oldest bank continuously operating under the same name in the United States. Its principal subsidiary, Wilmington Savings Fund Society, FSB, serves the residents of the Delaware Valley from its banking offices in all three counties of Delaware, southeastern Pennsylvania, and northern Virginia.
WSFS is a favorite of my Lynch model because of its growth/value combo. It has grown EPS at a 33% clip over the long haul and trades for just 13.2 times earnings, making for a 0.4 PEG. It also has a net cash/price ratio of almost 60% (Lynch defined net cash as cash and marketable securities minus long-term debt). According to this methodology, a high value for this ratio dramatically cuts down on the risk of the security.
Disclosure: The author is long NP, WSFS, OUTR, PLUS.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.