5 stocks that are growing, not pricey
By John Dorfman
Published: Tuesday, Oct. 29, 2013, 12:01 a.m.
This week I bring you a handful of stocks that have shown meaningful growth the past five years and yet aren't too expensive.
Using software from Value Line, I screened for stocks with the following characteristics:
• A market value of $250 million or more, with earnings of at least $1 a share (to provide some solidity).
• Growth averaging 10 percent per year or better in both cash flow and book value (corporate net worth per share) over the past five years.
• A stock price less than 15 times earnings (indicating out-of-favor stocks that might be bargains).
This is a pretty conventional growth and value screen, but with a little twist. I deliberately didn't use growth in earnings per share as a criterion. Earnings are volatile and can be manipulated fairly easily.
The growth criteria I used instead — growth in sales and in book value — are a bit more stable, and perhaps more resistant to manipulation.
BHP Billiton Ltd. (BHP) of Melbourne, Australia, is the world's largest mining company. It mines iron, nickel, copper, coal, diamonds and other metals and minerals, and also drills for oil. The stock trades in the United States as an American Depositary Receipt.
Miners are severely out of favor with investors now. Producers of raw materials usually do better in an inflationary climate. Today, many countries are fighting disinflation and trying to stave off deflation.
Also, investors have watched China's growth slow from about 10 percent a year as recently as 2010 to about 7 percent a year now. They fear it will slow further. China is a huge consumer of the raw materials that BHP Billiton produces.
I think that the risk-reward ratio on BHP Billiton is good, and I own it for a couple of clients. The past five years the company has shown 19 percent annual book-value growth, on average, and 16 percent sales growth.
World Fuel Services Corp. (INT), based in Miami, provides fuel, maps, and other support services to the operators of planes, ships and oil trucks. It's a business simple in concept but difficult in execution.
World Fuel has executed well, and shows 20 percent average growth in book value and 17 percent annual increases in sales the past five years.
You might think barriers to entry would be low in this business, but World Fuel's knowledge and contacts give it an edge, in my opinion. I like the stock at the current price of about $38 a share, which equates to 14 times earnings.
Would you believe that Apple Inc. (AAPL) shows a 47 percent rate of book-value growth and a 39 percent pace of sales growth over the past five years? Those are astounding figures. Investors obviously think such growth is unsustainable; why else do they accord Apple a valuation of only 12 times earnings?
My judgment is that Apple could slow down considerably and still be an attractively fast grower. At a 12 multiple, you don't need the company to keep performing miracles, just to do well. Meanwhile, you get a superb balance sheet ($42 billion in cash and near-cash) and a popular product lineup.
Valmont Industries (VMI) makes lighting poles, communications towers and irrigation equipment. The Omaha company has increased its book value at a 21 percent clip the past five years.
I believe the United States is in a sustained economic recovery. Valmont's businesses depend on the willingness of buyers to do capital spending. I believe the coming year will provide a favorable climate for that.
Probably my most speculative pick this week is Hawaiian Holdings Inc. (HA). The Honolulu company is the parent to Hawaiian Airlines.
Airline stocks are volatile, and prone to disruption by price wars, labor strife or increases in the price of jet fuel. My mentor in the securities business, David Dreman, once told me that neither he nor the even more famous investor Sir John Templeton had ever made money on airlines.
Warren Buffett, the greatest investor of our time, in most people's opinion, quipped that had a far-sighted capitalist been present at the first airplane flight at Kitty Hawk, he would have done investors a favor by shooting Orville Wright.
Be that as it may, I like Hawaiian Holdings now. I think tourism from continental United States to Hawaii will increase in the next couple of years. And I believe Hawaiian Holdings was sensible to strike up an alliance with China Airlines.
Over the past five years, the book value at Hawaiian Holdings has increased at a 21 percent clip. Yet the stock sells for a bargain-basement valuation of eight times earnings.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at email@example.com.
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