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This week we are focusing our attention on companies that have established strong track records for steadily increasing profits. We started by screening for companies that have delivered average annual earnings growth of at least 10% in their last full fiscal year and over the past five years. Out of this group, we then examined our profit projections to identify those that appear poised to extend this favorable track record both in their current fiscal years and out to 2016-2018. (Once again, we set the bar at 10% for both of these time frames.) Only about one-in-14, or roughly 120, of the 1,700 companies in our universe managed to meet these stringent criteria.

Not surprisingly, the stocks of many of these companies are in high demand with investors. Still, we did identify a number that appear to trade at modest valuations. Specifically, about 25 of these equities have P/E ratios of 16.5 or less, which would represent a 10%-plus discount from the current broader market multiple of 18.0. Within this group, we then turned our attention to 3- to 5-year price appreciation potential, setting a minimum of 40%, which compares favorably to the current of 30% for the Value Line universe. The 10 stocks below made the cut and are likely worthy of consideration by those seeking investment ideas for buy-and-hold portfolios. 

Company

Ticker

 Current PE Ratio

 EPS Growth 5-Year

 Proj EPS Growth Rate

 Proj 3-5 Yr % Price Change

Gap (The), Inc.

GPS

          13.4

              12

              14

              59

PetSmart, Inc.

PETM

          15.4

              16

              14

              51

Culp Inc.

CFI

          13.0

              31

              13

              48

DIRECTV

DTV

          12.2

              33

              17

              86

Eastman Chemical

EMN

          11.4

              11

              13

              41

Herbalife, Ltd.

HLF

          12.2

              27

              15

              44

Rock-Tenn 'A'

RKT

          11.4

              25

              15

              50

Smith & Wesson Hldg

SWHC

            9.9

              10

              25

              51

Nu Skin Enterprises

NUS

          11.9

              25

              27

           105

Standard Motor Prod.

SMP

          15.5

              40

              14

              49

The stocks on this list won’t necessarily be suitable for all investors. In particular, we call attention to the presence of Nu Skin Enterprises (NUS) and Herbalife (HLF). In the near term, at least, those considering positions in these two equities should be comfortable with an elevated level of share-price volatility. The market values of these two companies are both off more than 10% so far in 2014. The weakness is attributable to recent news regarding increased scrutiny of Nu Skin’s business practices in China, where the developer of skin care products and nutritional supplements generates about one-quarter of its sales. The company’s person-to-person marketing system, involving a network of nearly one million distributors and consumers, appears to be under particular scrutiny. In recent years, Herbalife has also been criticized by some influential investors for operating a similar distribution model. (Notably, the company doesn’t employ this strategy in China, where it generates about 5% of its sales.) Until there is more clarity on these matters, both stocks are likely subject to further wide price swings, meaning investors will want to proceed with extra caution. 

In the meantime, investors may wish to take a closer look at Rock-Tenn Company (RKT) stock, which appears worthy of consideration by a wider audience. The Georgia-based company is a leading provider of containerboard, coated recycled paperboard, and folding cartons to the North American market. 

Rock-Tenn is close to wrapping up the integration of its 2011 acquisition of Smurfit-Stone, but looks poised to realize further synergy and cost-reduction savings that should help to support a solid bottom-line increase in fiscal 2014, which ends on September 30th. It started the fiscal year in solid fashion, reporting sales and earnings growth of 3% and 23%, respectively, for the December quarter. The corrugated packaging and merchandise display segments were particularly strong, offsetting weakness in the recycling business. And while share net came in four pennies shy of our estimate, the market didn’t seem to mind, bidding the shares up modestly on the news.

Overall, RKT stock has faltered some in recent months since hitting an all-time high in September. The weakness, though, may present buy-and-hold investors with the opportunity to build a position here. These shares offer good appreciation potential for the 3 to 5 years ahead, given our outlook that annual earnings, which finished 2013 at $7.30 a share, will surpass $11.50 by 2016-2018. Meanwhile, with a yield of 1.4%, these shares aren’t especially compelling for income-oriented investors, though we do look favorably on the company’s increased emphasis on returning cash to shareholders. The quarterly dividend has more than tripled in the past five years, most recently being raised 17%, to $0.35 a share. We don’t anticipate such dramatic increases going forward, though annual hikes of nearly 10% seem likely, given our current profit growth projections. 

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.