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Stock Screen: Growth Stocks with Moderate Risk - February 13, 2012
This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and moderate risk. 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 90%, 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. 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).
Selecting growth stocks with the combination of worthwhile appreciation potential and low-to-moderate risk remains a difficult task, especially at a time when the prospects for economic growth have become more modest. 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 quality 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 that went to press on February 17, 2012.
Materion Corporation (MTRN), formerly known as Brush Engineered Materials Inc. (the name change occurred in March 2011), was founded in 1931, and is based in Mayfield Heights, Ohio. Through its subsidiaries, the company produces and sells engineered materials for electrical, electronic, thermal, and structural applications. Its products are sold to a variety of industries, including consumer electronics, defense and science, industrial components and commercial aerospace, energy, automotive electronics, telecommunications infrastructure, medical and appliances.
The company did not achieve its normal sales growth during the recent holiday season as most consumer electronics OEM customers chose to deplete inventories to very low levels in anticipation of reduced spending on discretionary wares. This turned out to be an accurate assessment. Also, the company passed metal cost deflation onto consumers through price cuts. Thus, management revealed its 2011 revenue tally is going to be “well below” prior guidance (Materion releases its fourth-quarter results on February 27th). The company also has to deal with expenses related to the building and opening of a new plant in Ohio, which should prove to be a near-term earnings headwind. Notably, the company’s guidance has proven conservative in the past.
Materion’s bottom line should pick up in the first half of this year as customers replenish inventories and demand for beryllium products gradually improves. Indeed, the company revealed that orders increased by 15% in the first five weeks of 2012, versus the fourth-quarter of 2011 rate. Materion is one of the largest producers of beryllium in the world, so it stands to benefit from rebounding demand from the consumer electronics, energy, and medical markets. Telecom equipment is perhaps the largest growth opportunity thanks to booming demand for mobile web access.
We expect the bottom line to register above-average gains over the next three to five years. The stock’s considerable recovery potential is derived from potentially better global economic conditions and rising overall demand for beryllium. However, investors will have to brace themselves for moderate risk, as the equity has a high Beta and a below average score for Price Stability.
NII Holdings, Inc.
NII Holdings Inc, (NIHD) formerly known as Nextel International, is a provider of wireless communications services mainly to business customers in Latin America, in particular Argentina, Brazil, Mexico, Peru, and Chile. Its services include digital voice calling, text and numeric paging, and two-way radio communications (a.k.a push-to-talk). At the end of 2011, the company had approximately 9.8 million customers.
NII Holdings’ prospects are somewhat mixed at the moment. Higher marketing spending related to a rebranding of certain product lines and a volatile global economy (which results in turbulence with foreign currencies), may dampen top- and bottom-line growth over the near term. We expect subscriber additions to remain vibrant, however, thanks partly to the marketing spending spree. Note: the company releases earnings on February 23rd.
Intense competition remains the biggest obstacle to success going forward. Despite strong growth in Brazilian subscribers during January, NII Holdings' three major competitors will likely continue to use promotional activity as a weapon. At the same time, NIHD is building out 3G infrastructure in Chile, Brazil, and Mexico over the next several quarters, which will likely hinder margins. On the bright side, that maneuver should help the company retain its customers, and improve its competitive position, particularly in Brazil.
The long-term is projected to be less turbulent, with growing demand for mobile data likely to boost the company’s top and bottom lines through 2016. During the upcoming months, it plans on broadening the selection of devices and adding a number of smartphones to its lineup. Furthermore, as the global economy recovers, the customer base is likely to start growing again, especially in the emerging markets.
This stock should appeal most to long-term investors. Though the issue does carry moderate risk, with a relatively high Beta and low score for Price Stability, it also has appealing price appreciation potential out to mid-decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.