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Stock Screen: Growth Stocks with Moderate Risk – March 4, 2011
This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. Given that growth is the main criteria, it is not surprising that the list contains several names in the Medical Supplies industry, including Life Technologies (LIFE), Stryker Corp. (SYK), and West Pharmaceutical Services (WST).
We began by screening for companies where share earnings have compounded at a minimum 15% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next 3 to 5 years.
Next, we limited the list to stocks with price appreciation potential of 60%, or more, over the next 3 to 5 years, measured from the mid-point of each issue’s Target Price Range. To control for risk, we required that all stocks selected have Safety ranks that are 3 (Average), or better (i.e. 1 or 2). Going one step further, we also required that each company have a Financial Strength rating of B+ (Average) or better. Additionally, minimum standards were set for Price Stability scores. These factors should help select those companies with lower-than-average risk profiles. Finally, to guard against near-term underperformance, we required that all stocks be ranked 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead). Investors should note that Safety, Financial Strength, Price Stability, and Timeliness are all proprietary ranks developed by Value Line.
Given these relatively stringent criteria, it isn’t surprising that there were only 14 issues in our universe that made the final cut. In fact, selecting growth stocks with the combination of worthwhile appreciation potential and low-to-moderate risk remains a difficult task, especially given the strength of the equity market over the last five to six months. Thus, the stocks listed below comprise an elite group. Many growth stocks, including some with better historical and prospective appreciation potential, were eliminated due to their less-than-stellar marks for Financial Strength or their volatile share price movements. We note, however, that the equities included below are likely to provide investors with worthwhile returns over the next 3 to 5 years, reflecting each issue’s prospects for price appreciation during that time frame.
Those wanting to hold less-risky stocks with good prospects may consider some of the choices listed below. As always, we strongly urge investors to consult the individual analyses in Ratings & Reports before committing to any of the issues that appear in this screen. All data are from The Value Line Investment Survey dated March 4, 2010. Investors should note that this is only a partial list. To see all of the issues that our screen returned, complete with Timeliness, Safety, Price Stability, and Financial Strength ratings, subscribers can click here.
Life Technologies is a global biotechnology tools company that was created by combining Invitrogen and Applied Biosystems in November, 2008. Its systems, consumables, and services enable researchers to accelerate scientific exploration, leading to discoveries and developments that improve the quality of human life. The company has about 9,000 employees and a presence in approximately 160 countries. Research and development expenditures amounted to $375 million, or 10.5% of sales, in 2010.
Life Technologies had a very productive 2010. The biotechnology company managed to bolster its top line by 9% and increase share earnings by 17%. What’s more, integration efforts associated with the November, 2008 merger have been completed, nearly a full year ahead of schedule. Finally, Life rolled out a slew of new devices and consumables, beefed up its operations, and improved its standing in a very competitive marketplace.
We expect the good times to continue rolling in 2011 and in 2012. Share earnings growth will likely slow some moving forward, but we expect it to remain at a low double-digit percentage rate. The company’s next-generation sequencing and forensics businesses ought to keep expanding at healthy clips, which should help propel the Genetic Systems group. Elsewhere, we expect demand for products housed in the Cell Systems segment to remain strong.
Stryker Corp. develops, manufactures, and markets Orthopaedic Implants and MedSurg Equipment. Orthopaedic products include hip, knee, trauma, spinal, and craniomaxillofacial implants. MedSurg includes powered instruments, endoscopic systems, other operating room devices, specialty stretchers, and maternity beds.
Stryker finished 2010 with better-than-expected results. The medical device manufacturing company posted a 9% year-over-year increase in sales during the fourth quarter, while share net jumped 22%. Revenues at the Orthopaedic Implants group rose nearly 5%, thanks to higher sales of hip, knee, and trauma implant systems. Business at the MedSurg Equipment group was even stronger, with sales rising 15%, driven by higher shipments of surgical equipment and surgical navigation systems, endoscopic and communications systems, and patient handling and emergency medical equipment. The company also benefited from recent acquisitions. Margins during the period widened because of the sales boost, along with management’s focus on operational efficiency improvements. Moreover, we look for solid top- and bottom-line gains in 2011 and 2012.
West Pharmaceutical Services
West Pharmaceutical Services manufactures systems and component parts (stoppers, seals, syringe components) used in the delivery of injectible drugs. The company also supplies packaging and delivery system components to food processors and makers of personal care products. Its West Monarch Analytical Labs division provides testing services that help drug companies meet closure/packaging regulatory guidelines.
Although the drug delivery company ended 2010 on a rather weak note, due to lower revenues related to the swine flu vaccine and negative currency movements, we look for higher earnings in 2011 and beyond. Results should benefit from solid demand and cost reductions. Therapeutic-drug use in the U.S. is likely to increase, as the large baby-boomer generation gets older and seeks treatment for chronic ailments like rheumatoid arthritis and diabetes. Increased access to healthcare in emerging economies should also be a key sales driver. In addition, the operating margin is expected to expand, as West moves up the value chain and its Delivery Systems unit continues its transformation from a low-margined contract manufacturer to a maker of proprietary products.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.