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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 2017-2019. (Once again, we set the bar at 10% for both of these time frames.) Only 125, or roughly one-in-14 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, which can lead to rather expensive valuations. Setting a maximum P/E ratio of 17.8, the current median for the broader market, eliminated about two-thirds of the stocks that made the initial cut. Of the 40 or so that remained, we then turned our attention on risk. Specifically, equities with a Safety rank of 1 (Highest) or 2 (Above Average), which would make them suitable for investors seeking to construct more-conservative portfolios. The seven we found are listed below. 

Company (Ticker)

Dividend

PE Ratio

AmerisourceBergen (ABC)

17.2

1.4

CVS Caremark Corp. (CVS)

17

1.5

Actavis plc (ACT)

14.9

              N/A

 Comcast Corp. (CMCSA)

17.6

1.8

Dollar General (DG)

15.7

              N/A

PetSmart, Inc. (PETM)

14.6

1.3

Union Pacific (UNP)

17.6

1.9

     

Among this list, Actavis (ACT) will likely be the most appealing to investors with a momentum orientation. The stock has backed off a bit from its late winter peak, but still has more than doubled in price since the end of 2012, including an advance of roughly 25% so far this calendar year. The company, which has a portfolio of branded, generic, biosimilar, and over-the-counter products has established itself as a dynamic player in the specialty pharmaceuticals arena. Sales and earnings have climbed at a sizzling rate so far this decade, with annual growth averaging 22% and 33%, respectively, between 2009 and 2013.

Big deals have been a recurring theme for the drug maker. Notably, the company was formerly known as Watson Pharmaceutical, but adopted the Actavis name after acquiring that company in late 2012. Looking ahead, management’s acquisition-fueled growth strategy looks to put it in position to maintain this momentum in 2014. Last October, Actavis completed its merger with Warner Chilcott. The transaction should provide a healthy boost this year, with earnings likely surpassing $13.75 a share, a 40%-plus increase from the 2013 final tally of $9.50. (In conjunction with the deal, the company reincorporated itself in Ireland, where Warner Chilcott was incorporated, but still maintains its administrative headquarters in New Jersey.)

And Actavis is hardly resting on its laurels. The drug maker, in fact, is working to put the final touches on another big addition. In February, the company reached an agreement to purchase Forest Laboratories for about $25 billion in cash and stock, and figures to complete the transaction this year. The addition would bring together two of the world’s fastest growing specialty pharmaceuticals makers and likely push combined annual revenues past the $15-billion mark. The combination also provides the opportunity for $1 billion in operating and tax synergies, which would help to make the deal strongly accretive to earnings in 2015 and 2016.

Debt levels have ramped in recent years, from roughly $1.0 billion at the start of the decade, to more than $8.5 billion, or just under 50% of total capital, as of the March quarter. With its expanding earnings power, the company appears well equipped to handle the added financial leverage, including any Forest-related borrowings. That said, the spate of large deals in recent years does increase the potential for operational miscues, in our view, meaning investors will want to keep a watch that Actavis is making steady progress integrating all of the recent additions.

The impressive earnings and share-price momentum has lifted Actavis stock to the top of our Timeliness rankings. It carries our Highest rank (1) for relative to price performance in the year ahead. And even following its lengthy run, this equity still looks to offer good appreciation potential for the three to five years ahead. Too, ACT shares carry a rank of 2 (Above-Average) for Safety though, as we mentioned above, investors can’t afford to get too complacent while the company is integrating the sizable acquisitions that have helped to power its growth. Finally, income-oriented accounts will want to note the absence of a dividend before committing funds here.

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