Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Selection & Opinion that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that should continue to do so in the future, such as Urban Outfitters (URBN), Apple (AAPL), and BHP Billiton (BHP).
To make our list, all stocks had to be ranked 3 (Average), or better, for both Safety and Timeliness (i.e., relative price performance in the year ahead), two of Value Line’s many proprietary rankings. Additionally, all of these companies have managed to increase earnings at a 12%, or better, compounded annual rate over the past five years, which is no easy feat considering that this time span included varying rates of economic growth. We also required at least 15% earnings growth in the current fiscal year and a minimum of 14% projected three- to five-year profit growth. We further limited our list to stocks that had moved up in price by at least 17% in the past 13 weeks, thus ensuring strong relative price momentum.
The resulting list is an interesting mix of names (some surprising, others not), that not only performed well even as economic growth slowed, but are projected by our analysts to have worthwhile earnings growth prospects in the year ahead. Below we highlight some of the stocks from our screen:
Urban Outfitters, Inc. is an apparel and accessories retail company that operates under the Urban Outfitters, Anthropologie, Free People, and Terrain brands. It also operates wholesale businesses under the Leifsdottir and Free People brands. As of October 31, 2010 the company had 166 Urban Outfitters stores, 150 Anthropolgie stores, 38 Free People stores, and one Terrain center. Additionally, Urban Outfitters sells products and markets its brands directly to consumers through websites and catalogs.
The retailer likely finished fiscal 2010 with an exclamation point (ended January 31, 2011), as it was probably able to capitalize on management's aggressive expansion initiatives. (The company opened more than 40 stores in fiscal 2010). Too, Value Line analyst Andre J. Costanza thinks that Urban Outfitters was able to take advantage of the improved consumer spending environment as well as the latest fashion trends, and that comparable-store sales increased slightly, with Anthropologie and Free People likely leading the way.
Fiscal 2011 should be another good year for the company. The rollout of about 45 additional stores, a slew of new fashions, and a better consumer spending environment ought to augment the top line, and management's disciplined inventory- and cost-control programs should keep margins wide. Looking further out, Mr. Costanza feels the company has ample room to expand its store count without saturating the market. The company’s strong balance sheet, with no debt and ample cash, should give it plenty of financial flexibility to grow. Finally, a new share repurchase authorization will likely lend further support to the bottom line.
Apple is one of the world's largest makers of personal computers and peripheral and consumer products, such as the iPod digital music player, the iPad tablet, and the iPhone smartphone, for sale primarily to the business, creative, education, government, and consumer markets. It also sells operating systems, utilities, languages, developer tools, and database software.
Apple shareholders were rattled recently when the tech giant announced that its legendary CEO Steve Jobs will be taking another medical leave of absence. This news hit Wall Street about two years after Mr. Jobs, who recovered from pancreatic cancer in 2004 and received a liver transplant in 2009, took his first medical leave. Taking over Apple’s day-to-day operations is Tim Cook, the company’s chief operations officer.
Only days following the announcement, however, Apple provided some solace for investors when it reported results for the fiscal 2011 first quarter (ended December 25, 2010). Indeed, in the December period, share earnings came in at $6.43, well ahead of our estimate and 75% above the year-earlier tally. The upside was primarily attributable to better-than-expected gross margins (favorable component prices were a major plus) and brisk sales of the new iPad tablet PC. Also, the company continued to gain ground in the traditional computing space, with Mac shipments climbing more than 20% on a year-over-year basis. And investments overseas started to yield greater benefits, as evidenced by a whopping 400% sales increase in the important Chinese market.
Value Line analyst Justin Hellman believes that the company is poised to deliver more strong results in the coming quarters. Although Apple’s iPod digital music player business will likely slow, bottom-line growth ought to be driven by brisk demand for the iPhone 4 smartphone (soon to be available through Verizon (VZ – Free Verizon Stock Report)), gains in the core Macintosh computer line, and the iPad tablet.
BHP Billiton Ltd.
BHP Billiton was formed on June 29, 2001 when BHP merged with Billiton Plc. Today, the company produces a variety of commodities, including crude oil, natural gas, iron ore, nickel, copper, diamonds, coal, minerals, and steel. It operates in Australia, as well as several other countries, including Chile, South Africa, and the United Kingdom.
BHP Billiton probably won't be acquiring Potash (POT) anytime soon. The company recently launched a campaign to purchase the fertilizer giant for roughly $38 billion, or $130.00 per share. However, Potash's board of directors dismissed the offer on grounds that it did not appropriately value the business. Moreover, the deal was also blocked by the Canadian government, because it was reluctant to allow Potash, one of Canada's prominent businesses, to fall into foreign hands. Despite the setback, BHP Billiton is still looking to get into the potash business.
Meanwhile, Value Line analyst Adam Rosner looks for BHP Billiton to post strong near-term results, which should benefit from the rising prices for energy and metal commodities. Too, demand ought to be fueled by the ongoing expansion of developing countries such as China, India, and Brazil, as well as the recovery of industrial production in the U.S.
To see the results of our screen, limited to those stocks that carry Above-Average scores Timeliness, subscribers can click here. As always, subscribers should carefully review the analyses in Ratings and Reports before committing funds to any particular equity.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.