We continue to see worrisome commentary about market valuations, with hand-wringing about whether the stock market is overvalued or might be in a bubble… and it can get a bit draining, frankly. Caution is important, diversification is important, but worrying does us little good. Yes, investors are paying a steep price for anticipated growth in many stocks… yes, the stock market is at the top end of “normal” valuations over the past several decades, and yes, short-term interest rates near zero obviously have a lot to do with the stock market’s success… when money’s cheap, it’s easier to use it to gamble.
But really, none of us is going to be able to forecast when things might turn. Yes, there will probably be a bear market at some point, and there are always bull and bear markets in particular sectors or niches of the stock market. But one thing that almost always helps to fuel the top stocks is that growth makes investors happy. Ever since Peter Lynch told us all that we could invest for ourselves and find fast-growing ideas by looking around our communities and watching what we buy, investors have been willing to pay sometimes steep prices for companies that are proving they can grow revenues and earnings (yes, it’s OK to say “sales” instead of “revenues,” or “profits” instead of “earnings” — but that will make you feel less important, and your pinstripe suit might be confiscated).
So even with Peter Lynch’s “Growth at a Reasonable Price” perhaps getting a little harder to find (he particularly fancied what he termed the “PEG ratio” — price divided by earnings divided by expected five year growth rate, positing that growing faster than the PE ratio, a PEG ratio of less than one, is a possible sign of a bargain growth stock — he thought of a PEG of 1 as “fair”), we still all hope to buy that next company that revolutionizes something, or builds their business better than competitors, and creates a true colossus over time on the back of an exceptional and sustainable growth rate. So where do we find these stocks?
Well, one place to look is among the growth-lovers — the folks who make their living finding and buying the stocks that the rest of us typically think of as being “too expensive,” at least at first glance. David Gardner at the Motley Fool has made his reputation at one end of that spectrum, being the guy who buys and holds forever the incredible, world-changing companies that make 1,000% gains over a decade or more (Netflix, Priceline.com, Disney/Pixar/Marvel, etc.), and part of his “rule breakers” criteria for an investment is that Wall Street and those running the “conventional wisdom” business must think it’s already “too expensive.” David’s ideas rely on stories, of his perception about the future potential of a business because it’s shaking things up and doing something different that’s going to be far more powerful than the Street expects.
At the other end of the growth-seekers is the quantitative and momentum group — those who don’t look for stories or forecast the future, but just say, “this company is growing fast and faster and investors are loving it more and more, and that’s likely to continue” — that’s probably an unfair characterization, but it’s how I think of these folks, and in many ways their King is Louis Navellier, who has been putting out his numbers-driven newsletters for decades and often puts up fantastic results in bull markets. His systems screen for lots of criteria, including earnings growth and momentum and analyst upgrades and momentum, and in order for a system like this to work you have to own enough stocks for the averages to play in your favor — so his promises about any single stock should be taken with a grain of salt (as should David Gardner’s, to be sure — Gardner’s put together an incredible string of long-term growth stock picking success, but the fact that his portfolio has a few 1,000% winners helps greatly to diminish the impact of a handful of 50-90% losers… unless, of course, you just bought the losers).
But looking at individual stocks is most of what we do… So since we’re starting the week with lots of stories in the media about stocks being expensive, and more general worriment, I thought I’d look and see what Louis Navellier is touting as his “bulletproof blue chip stocks” for those who are looking for that next winner (David Gardner hasn’t been touting any new ideas in recent weeks that I’ve seen, or I would have thrown one of those on the pile today as well).
Louis Navellier has a handful of these “bulletproof” stocks he thinks we can “buy now” — so let’s run through and see what the first few are…. clues, please!
“The first bulletproof stock I want you to buy passed my stringent 8-point test with flying colors.
“Rapidly growing earnings? Check. Rapidly growing sales? Check. Positive earnings surprises, consistent earnings growth and strong cash flow? Check, check and check!
“The company posted stunning 2Q numbers. Compared with the year ago quarter, net revenue jumped 59%—easily topping the consensus estimate. Notably, North American brands revenue nearly tripled, thanks in part to a recent acquisition that contributed $258 million in net revenue.”
Can’t you feel yourself relaxing already? Really, anytime you’re finding yourself hunched over your desk with worry, thinking about taking profits, or pricing freeze-dried food and ammunition, read a teaser ad for a growth stock newsletter… the greed synapses will kick in and you’ll feel better in no time.
More on this one? Just a bit…
“A clear leader in its industry, the company is perfectly positioned for more growth ahead thanks to strong sales and a one-two punch of strengthening its existing brands and introducing in-demand new products. I see tremendous upside from here.”
So… hoodat? This is, sez the Mighty, Mighty Thinkolator, everyone’s favorite mega-growth pharma stock, Actavis (ACT), which has almost tripled in two years and has one of those charts, common in biotech but not that common among $100+ billion companies, that goes up in true “hockey stick” fashion, with almost no meaningful dips along the way.
Growth stock, indeed. The big acquisition was, of course, Allergan, which they “won” from Valeant after a protracted dance, and that is helping them to further step up the growth rate. This is, like Valeant (VRX), a company that seems to have a management team sprinkled with fairy dust as they turn acquisitions into earnings growth and build on brands within the pharmaceutical industry without relying too much on single blockbuster drugs or taking huge “patent cliff” losses along the way. I don’t know Actavis well, but they have a large generics business as well as the Allergan eye care and botox and aesthetics businesses and a dozen or so fast-growing (or nearly approved and expected to be fast-growing) branded drugs of meaningful market size. They are not a one-product company, and I’m not sure that they even have a single billion-dollar “blockbuster” drug at this point (in terms of annual revenue), though Namenda probably hits that mark (as does botox).
Actavis is complicated to look at and value, largely because they’re so dramatically acquisitive that there are non-recurring and unpredictable financial things almost every quarter as new companies large and small are added to the fold. Their past year was not technically profitable, according to the SEC filings, but they did generate a lot of cash and the “pro forma” or adjusted numbers come out to about $15 in profit per share over the past four quarters… analysts see those numbers getting to about $18 for 2015 and $21 for 2016, so that means the shares are trading (at $300ish) at roughly 15 times next year’s earnings. That matches up nicely with the analyst-forecasted five-year growth rate of 17%, so they are trading at a PEG ratio below one. You’re putting a fair amount of faith in management, since growth will continue to depend on acquisitions and on the profitable integration of their current acquisitions, but that’s definitely “growth at a reasonable price” if it keeps up.
I don’t own Actavis, though I do have a substantial indirect position in their “roll up” competitor Valeant because of my holdings in both Pershing Square Holdings (PSHZF) and the Sequoia Fund (SEQUX), Valeant is (by far) the largest holding of both of those funds.
How about another, Mr. Navellier?
“This next bulletproof stock is set to profit from the perfect blend of demand and aggressive growth.
“This bulletproof stock is known for being one of the nation’s largest retail grocery chains. But what many don’t know is that the umbrella also covers nearly 1,200 gas stations, 800 convenience stores, over 300 jewelry stores (yes, jewelry!) and 37 food processing facilities. This food supplier’s biggest competitors for a place at the dinner table are facing major crises and record high prices that are driving even more customers to this tasty alternative.
“The company continues to maintain a spot on my Top Stock List, appearing for six-straight months, thanks to strong earnings and sales growth. The retail grocery chain has grown more competitive with its prices, and that’s attracting customers away from big box stores like Wal-Mart (as evidenced in WMT’s recent disappointing report).”
Sounds interesting, right? You might be able to guess the name just by the size, and the presence of those jewelry stores, but how about a few more details to make sure we get the Thinkolator a full meal?
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“In its most recent quarter, adjusted net earnings were $1.04 per share. Analysts were predicting adjusted net earnings of $0.90 per share, so the company posted a healthy 15.6% earnings surprise.
“Over the same period, total sales climbed 9%, also beating the consensus estimate. Excluding fuel sales, total sales jumped 14.2% over last year. Looking ahead to FY 2015, the company is targeting net earnings between $3.80 and $3.90 per share. This is well above the Street view of $3.72 EPS.”
Who do we have here? Thinkolator sez this is Kroger (KR), the grocery store chain that has grown in part by acquiring lots of regional supermarket players around the country over decades (that’s why they own those jewelry stores, a relic of the Fred Meyer acquisition that they made more than 15 years ago). And they certainly seem to have figured out a way to profit from selling groceries in a way that’s pretty unmatched across the sector — they operate under a half-dozen or so different major brands and have a strong presence in much of the country, with the glaring exceptions being Florida, New England and the “colder midwest” (Dakotas, Wisconsin, Minnesota). It so happens that I’ve almost never been in Kroger, with occasional exceptions (Harris Teeter when I lived in DC), but at least half of you probably darken their doors every week, and they certainly are popular on the stock market.
Grocery stores can’t easily grow at the pace of a pharmaceutical company, not without truly dramatic acquisitions — the profit margin is just too small and, absent population growth, the marketplace isn’t really expanding so they have to take market share from competitors. People buy groceries every day, but new products don’t necessarily create new markets or new revenue like they might with a new technology product or new drug. People aren’t likely to spend 10% more on groceries next year than they do this year (absent inflation), so you have to operate very, very well, compete, and make your customers happy. Kroger seems to have done that awfully well, and they have outpaced all the other major supermarket chains in terms of stock performance in recent years — even Whole Foods (WFM), which was neck-and-neck with Kroger on performance until their February swoon this year.
Kroger is still a bit cheaper than Whole Foods, with similar growth expectations, but it’s not nearly as cheap on a PEG basis as Actavis is — not really a surprise there, given the stability and the relative predictability of the grocery store business compared to pharmaceutical developers. KR has a PEG ratio right around 1.7, which falls out of the “bargain” category but still remains “reasonable” depending on who you ask — many pundits will tell you that a stock with a PEG ratio under 2 is worth researching. Don’t know much else about Kroger — they have a fairly large debt burden (though nothing like the huge debts that took down late competitors like A&P), they are probably fairly valued, and since they trade at a tiny price/sales ratio (0.33) and have vast nationwide operations, any improvements they can make to margins have a substantial impact on the bottom line almost instantly. Grocery stores are a tough business, without a lot of margin for error, but they certainly shine compared to most of their competitors.
“Bulletproof Blue Chip Stock #3
“Healthcare Titan Delivering Stunning Growth
“Here’s a number that might shock you…we spend a whopping 17% of GDP on healthcare. That’s more money per person than any other country on the planet. Obamacare aside, is it any wonder that there is massive pressure to make hospitals, pharmacies and our overall healthcare system more efficient?
“My next bulletproof stock is leading the charge. This is a fast growing company in the right sector, at the right time, making all the right moves. It is one of the top U.S. providers of pharmaceuticals, medical supplies and healthcare information technologies (like electronic medical records and automated inventory management).”
There’s been quite a bit of consolidation in the drug distribution and healthcare services businesses, so we’ll need a few more details to make sure we can name the right one. Thankfully, Louis obliges:
“It delivers one-third of all medications used in North America, and more than half of all U.S. hospitals use their services.
“The company delivered 19% sales growth and 8% adjusted earnings growth in the last quarter. But I expect earnings growth to explode in 2015 thanks to a $500 million stock buyback program.”
Right you are, this one is McKesson (MCK), probably the oldest healthcare services firm in the country and the largest drug distribution company — they’re about twice as large as Cardinal Health (CAH), which is the other major publicly traded drug distributor. MCK’s two largest businesses are US healthcare services, including a lot of technology, software and support services for medical records and billing, and drug distribution to hospitals, specialty and retail pharmacies. They are also expanding rapidly overseas, where they also own several drugstore chains (particularly in Europe), and they do have a pretty steady record of sustained revenue and earnings growth — with growth stepping up a bit in the last year or two, thanks partly to acquisitions.
McKesson has done an admirable job of allocating capital to growth over the years, though they do also engage in both share buybacks and pay a (minimal) dividend, and they did recently authorize $500 million for a share buyback — that doesn’t necessarily make them stand out in their niche, Cardinal Health and other somewhat similar companies like Amerisource Bergen (ABC) are doing pretty big buybacks as well.
Analysts are pretty optimistic about the next couple years — the adjusted earnings were just over $11 a share last year (their fiscal year ends in March), and they’re expecting $12.50 or so in the current year and $14.50 in the year following, so that’s a solid growth trajectory if the company can hit those numbers. The forecast is for continuing earnings growth of 16-17% for the next five years, and the stock trades at a “next 12 months” PE of about 19, so the PEG ratio is just a hair over 1 — about 1.1 or so, depending on exactly which numbers you use. It’s a $55 billion company, they have a fantastic balance sheet with easily manageable debt, and they still seem to think they can keep the growth compounding. It’s not dirt cheap on the current numbers, but it’s certainly a “blue chip” type company, with a huge and extremely well-established position in an oligopolistic business (it would take huge effort for new competitors to enter the business, which generally has very tight profit margins, kind of like grocery stores, that aren’t tantalizing for new entrants), so I’d say this one definitely hits the “reasonable” part of “growth at a reasonable price” tied up pretty good. Whether they get the “growth” part, of course, depends on the future — but it’s certainly a reasonable growth stock to look at. They had a nice “overview” presentation at the JP Morgan Healthcare Conference that you can see here if you’re curious.
Louis has a few more “bulletproof” gems that he teases, I’ll try to get to those in a future installment if there’s interest — so what do you think? Want to bet on growth without getting too crazy? MCK, ACT and KR are certainly not ridiculous picks, even if they might not necessarily appeal to “value” investors, but are they right for you? That’s your call — let us know what you think with a comment below.