I was looking into a couple little eensy teensy microcap stocks that are being touted this week, and I just didn’t have the heart to write about them for you — I do cover microcaps from time to time, but I know that most of you are too experienced and sober to be investing in these with any regularity (or even taking them seriously at all)… and, frankly, I don’t feel great about the fact that my writing about a $10 million stock can cause it to jump up by 25% even if I say unflattering things about it.
So I might mention one or two of those teensies later in the week, maybe in the Friday File where we’ve got a much smaller audience, but I decided to mentally switch gears to “big growth” — an area where a lot more of you are likely to be interested, and where the companies are, as a rule, far more mainstream and reasonable.
Navellier’s shtick is to focus on growth above almost all else — growth and momentum in both earnings and analyst estimates and growth in sales and margins are all important in his quantitative system, and that system has sometimes done well for long periods of time… though is also, according to Hulbert, has performed quite poorly during bear markets. The newsletter he’s pitching today is his Blue Chip Growth, which is one of his lower-priced offerings (about $100/year these days, his other letters are typically $1,000-$5,000) and the one that Hulbert says has typically done best among his newsletters in the past (other more expensive letters focus on smaller cap or “emerging” growth stocks, Blue Chip usually covers large cap companies that most of us will have heard of).
And he thinks things are pretty good for some stocks, the attention-getting bit is that there’s a “seismic shift” and a “disaster looming” for the broad stock indexes. Here’s how he puts it:
“The soaring greenback is destroying sales growth and earnings for large and mega cap multinational stocks that get a significant portion of their profits from outside the U.S.
“That is a disaster for hundreds of big name, widely held stocks.
“And it spells big trouble for the Dow and S&P 500 Indexes, which are over weighted with these big multinational stocks.”
His stocks, however, will be benefitting from the “Goldilocks Economy” enjoyed by those companies who don’t depend on overseas profits…
“You see, this is what I call a ‘Goldilocks’ economy. This moderate economic growth with a hint of worry is “just right.” Not so hot that the Federal Reserve needs to do anything drastic with interest rates, but not too cold either.”
Summing up, from Mr. Navellier:
“The really important takeaway that most investors are overlooking right now during the never-ending Fed guessing game…
“No matter when the Fed finally raises rates—whether that is in October or December or not until 2016—this first rate will be minimal and I expect the Fed to take a “one and done” approach, making it the only rate hike for quite some time.
“That means rates will stay near zero well into next year.
“That is great news for savvy companies (like the ones on my buy list today) that are using cheap rates to borrow money and invest it in continued stock buybacks, business expansion and M&A.
“That’s why, contrary to all the doom and gloom you are hearing in the media, all of my analysis, all of my indicators and all of my 30 years of hard-won experience tells me that the next 18 months can be a fantastic time to make money IF—and only if—you own the right stocks.”
I actually more or less agree with him on that big picture stuff, but — despite his claim of being an iconoclast — so do lots of other folks. The consensus, as I interpret it, is that rates will go up slowly and not very far in the next year or two, and that the dollar will remain strong. Don’t know if that’s what will really happen or not, but it makes sense to me.
So, then, what are the stocks on his “buy list” for this environment? Let’s go through the clues one by one and see if we can name a few of them for you…
“Top Stock #1: Conservative Stock Delivering Aggressive Growth
“The first stock on my buy list is a consumer staples and retail play that gets 100% of its revenue from right here in the U.S. That gives it a big advantage over multinational competitors that are taking a hit because of the strong dollar we talked about earlier.
“Being 100% domestic also means the company is not at risk from any possible economic slowdown overseas.
“The company has been making all the right moves the last two years, from reinvesting heavily in their flagship stores to making smart acquisitions to expanding their product line.
“Its private label launch into the red-hot organic food market rocketed to $1.2 billion in sales in just two years!Are you getting our free Daily Update
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“And it’s all showing on the bottom line. The company absolutely crushed expectations with a stellar Q1 earnings report. Earnings jumped a whopping 24% to $1.25 per share.
“That continues an incredible earnings streak over the last 13 quarters that have seen the company beat earnings 11 times. Remarkable!
“The company has posted positive comparable-store sales for an incredible 46 consecutive quarters. And it has an equally stellar record of growing market share, taking market share from its competitors 10 years straight. Wal-Mart, for example, lost market share to this company in every market last year!”
This one is Kroger (KR), a company I’ve been looking at a little bit recently because their success is often contrasted with the falling fortunes of Whole Foods Markets (WFM), which I’m starting to find tempting as it drops in price. Kroger has been doing incredibly well, with very strong growth for several years fueled by acquisitions, expansion and their own same store sales growth — partly due to their increased offerings in natural and organic foods.
The numbers are an exact match, though you should cut that $1.25 a share earnings number in half in your head — the stock split over the Summer, so it was actually $0.625 cents as far as current shareholders are concerned. KR also raised their guidance when they released their second quarter numbers about two weeks ago, so if they hit the top end of that guidance range ($1.98) the shares now trade at about 18X current year earnings (we’re halfway through their fiscal year). That’s pretty reasonable for a stock with earnings growth expectations of close to 10%, but it’s not cheap — and you do have to have the expectation that they can continue this growth. So far that’s been a pretty good bet… whether or not they continue to outpace their competitors, well, I can’t tell you that.
This is, as you would imagine, an “A” rated stock in Navellier’s quantitative system — you can see his free summary on it here. I’ve resisted this one and been wrong to this point.
“Top Stock #2: Red Hot Retailer Rules Its Bulletproof Industry
“The next stock on my buy list is delivering results that simply blow away the competition…
- Q1 sales jumped 21% over last year
- Double-digit profit growth for 17 straight quarters
- HUGE jump in same store sales: 11.4%— one of the best in the business
- Net earnings are up 33%
- Profit margin is an impressive 35%
- And it beat Q1 earnings by an outstanding 11.8%.”
This one is Ulta Salon (ULTA), which sells cosmetics under the Ulta Beauty name through its own stores and online, kind of like Sephora (which is owned by LVMH). I’ve never looked at it before today — to be honest, I’ve never even noticed one of their stores and had to ask Mrs. Gumshoe what it was, but it has certainly been a barn burner in recent years. It’s growing fast, it’s priced as if it’s growing fast, but the often-used PEG ratio is fairly reasonable (with a forward PE of 30 and expected earnings growth for the next five years of 20%, the PEG is 1.5… not cheap, but reasonable compared to a lot of growth and momentum stocks). Obviously, predicting growth rates five years into the future is ridiculous… but yes, analysts expect them to keep growing. There is some chatter now about the stock having priced in a lot of growth, as noted in this recent story from IBD, and they didn’t beat on earnings quite as much this past quarter as they did in the first quarter, but if you like growth you’ll probably find ULTA pretty appealing. Analysts have been lifting their forecasts pretty consistently and it is, of course, also A-rated by Navellier.
Can we feed one more to the Thinkolator before it’s time to put it back in the garage for the evening? Of course!
“Top Stock #3: Healthcare Titan You Can Buy Dirt Cheap
“I was already excited about the prospects for the next stock I want to tell you about.
“Then they announced a bold acquisition move that blew me away!
“This healthcare company knocked it out of the park again in Q2 delivering a 12.7% earnings surprise on top of last quarter’s huge 18% earnings surprise! It also lifted its 2015 earnings outlook.
“But their already good growth prospects just got even better thanks to a massive new acquisition that will make them one of the biggest players in their industry.
“The deal is expected to add 10% to adjusted earnings per share. It will give the company more leverage to negotiate lower costs with providers. And it will lower costs by sharing expenses for IT, customer service, and so on between the two companies. In just two years, it’s projected the deal will deliver $2 billion in cost savings. On top of healthy growth, the stock pays a handsome 2.5% dividend. AND it repurchased another 4 million shares of its own stock.
“But despite all of this positive news, you can still buy the stock cheap. You can get on board today for just 14 times forward P/E. A bargain if I ever saw one! Add this healthcare stalwart to your portfolio today.”
This one is not a 100% match, but the Thinkolator is almost positive Navellier is teasing Anthem (ANTM) — which is indeed trading at 14X forward earnings, and has announced a major acquisition (of Cigna) that would deliver $2 billion in cost savings and be 10% accretive to earnings in the first year… but they don’t pay a 2.5% dividend, they pay a $2.50 (annual) dividend, which at a $150 share price means the yield is about 1.65%. Not bad, and the dividend has more than doubled over the past four years, but not quite a match. Presumably Navellier’s copywriter had a typo, but we are left with just a chance that the Thinkolator is wrong here. Analysts were expecting an average of either $2.75 or $2.77 per share in earnings last quarter, depending on who you ask, and the adjusted earnings came in at $3.10, which is indeed a “beat” of that $2.75 number by 12.7%.
Good enough for me. Anthem is a health insurer that operates mostly under the Blue Cross/Blue Shield name, and they’re one of the largest health benefits providers in the country — they’re also my health insurer, as it so happens, not that this makes me much of an expert on them. I can say that they have the same ridiculous and bureaucratic approval and review and payment procedures as every other irritating health insurance company I’ve ever used, but it sure is way, way better than not having health insurance.
The company was formed from the merger of Wellpoint and Anthem about ten years ago and operated as Wellpoint until last year, when they changed the corporate name to Anthem, partly because it matched better with the consumer brand they were (and are) selling as a major participant in the new health insurance exchanges around the country. Presumably there will be a lot of review of the proposed acquisition of Cigna, but they are expecting it to be very profitable — I don’t know whether that’s primarily because of efficiencies, or because it will be easier to squeeze a little better pricing out of providers if they have a larger network and slightly less competition. The stock is fairly cheap, it trades at a lower PE multiple than Cigna (CI), UnitedHealth (UNH) or Aetna (AET), though if you account for the earnings growth estimates at those companies those four major health benefits firms all have similar PEG ratios in the 1.3-1.6 neighborhood… probably the opportunity for outperformance at Anthem is if the Cigna acquisition is approved and goes as well as they’re hoping, since those growth number arguably aren’t yet priced into the stock.
And yes, Anthem is, no surprise, a Navellier “A” stock.
So there you have it – he’s got a few more stocks to tease that fall into the large cap growth camp, and I’ll feed those to the Thinkolator for you soon if there’s any interest, but we’ve now got three growers to chew on… anything appeal to you among Anthem, Kroger and Ulta? Let us know with a comment below.