Navellier’s “Three ‘Perma-Bulls’ to Buy Now”

by Travis Johnson, Stock Gumshoe | April 17, 2014 1:38 pm

Solving the Emerging Growth teaser for three stocks "to count on for strong profits during the market volatility"

Whenever you’re feeling blue about the market and don’t have the stomach for some Jim Cramer ranting, a nice substitute can be a trip over to Louis Navellier[1]’s world, where there’s always a promise of extraordinary growth somewhere.

Today Navellier, a quantitatively-minded growth stock investor (meaning, his system sifts stocks largely based on trends in earnings, analyst estimate changes, revenue growth — particularly earnings beats and analyst raises and the growth in estimates), has been promoting his Emerging Growth[2] newsletter recently with a pitch that he has found the “Perma-Bulls” you want to buy during down markets like these.

And he says he’s been preparing for this weak, toppy market for months now — here’s how he puts it:

“With the strong end to 2013 and the tremendous start to the year, I knew that quarter-end profit taking would hit the market.

“So my team and I went to work on creating a can’t-lose plan to guide my readers—individual investors just like you—through what could become another market ‘fake out’ that would send them to the sidelines and set them up to miss the next round of profits… even though no one would see it coming until it was far too late and the bears started making front-page news.

“My team and I drew up a blueprint that could create a fortress around my reader’s wealth. It had two prime directives:

• Safeguard my readers through a worst-case scenario with investments to count on for strong profits during the market volatility.
• Ensure the plan would include only stocks that would be the first to come back after volatility subsided.”

“Our unique and intensive research process uncovered three under-the-radar stocks that are about to emerge from the pack with unstoppable growth.

“And I’d like to share the details of these companies with you.”

He’d like to share, that is, if you’d like to subscribe to Emerging Growth — that’s not his most expensive newsletter, but at $995 a year it ain’t cheap for most individual investors … and the appeal of paying 20% more for the quarterly option (special deal! Only $295 for three months!) is, well, limited.

So… shall we find out what those three “Perma-Bulls” are that he wants to buy? Who knows, maybe you’ll love these stocks and they’ll make you rich — and then you’ll decide you want to subscribe to Navellier’s newsletter. But for now, let’s see if we can get you some answers a bit more free-ishly.

“Perma-Bull #1: The Ultimate Energy Stock

“This play is relatively young company in the energy game. But it is taking the industry by storm.

“The company is leading the fracking[3] boom with excellent oil[4] and gas resources in the United States.

“And the financials are solid. Sales Growth for the upcoming quarter is expected to reach 38% while Earnings Growth is set at 35%. And analysts are STILL moving their estimates higher.

“How are margins? Profit margins are north of 16% and operating margins are a stunning 30%.

“Add up these figures, and they equal one HUGE profit maker. I’m looking for its stock price to go through the roof in early 2014. This is a stock I’d jump on quickly.”

That’s probably not enough for me to be 100% certain of the Thinkolator’s match, but we do have one excellent match from the first pass of results so I think we’ve got a very good chance of this being: Matador Resources (MTDR)[5]

That’s an oil and gas stock, yes, also relatively young (went public about two years ago) and is in the fracking business (as are hundreds of other companies), but it does also have profit margins just over 16% and operating margins at 30% as of their last quarter … so that’s a solid match. And they have had analysts upgrading their earnings expectations of late with some unanimity, which is a little bit unusual (most oil and gas companies I’ve been scanning through have both upgrades and downgrades to earnings estimates over the last couple months).

Analyst estimate averages depend on which service you use, so it’s hard to say what a real match is in that area — the compilation at Yahoo[6] Finance tells us to expect 40% sales growth and 45% earnings growth this quarter, though earnings for the full year are expected to be flat before growth picks up again in 2015.

This also shows up as a highly rated IBD stock, which tends to coincide with many Navellier-liked stocks (IBD’s method also looks for growth), and the stock has been a top-rated one by Navellier’s Portfolio Grader for more than six months and was recommended by him in a short appearance on CNBC a few weeks ago[7], so we know it meets his criteria and he likes it. And while they just met earnings expectations in the fourth quarter they did blow them out in the previous three quarters, and huge earnings beats have tended to be one of Navellier’s favorite indicators.

This is still a fairly small company, with a market cap under $2 billion and not much debt. They are active in mostly Texas and Louisiana, with several hot ticket keywords like “Eagle Ford Shale” and “Permian Basin” coming up next to their name, but I don’t know much about their business. They are priced for growth and they have been growing nicely, with a forward PE of about 15. I’ll leave the researchifying on this one to you, go forth and do your cogitating … if you learn anything interesting, feel free to share it with a comment below.

We’ll move on to number two …

“Perma-Bull #2: The Super Supplier

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“Believe it or not, it takes a lot of equipment, parts and supplies to keep the lights on. My next company is THE provider of products and services to electric utilities[8] in the U.S.

“And we’re not just talking about wires and electrical tape. This perma-bull does smart-grid monitoring, regulator consulting, grid system design and energy efficient products like LED[9] light bulbs.

“Perma-bull #2 deployed 350 electric crew members to the Southeast to respond to power outages, deliver generators and help people through the horrendous weather.

“In the last quarter, revenue grew 54.3%. This quarter analysts are expecting a modest 32%.

“This company has a history of beating analyst’s expectations. It racked up an earnings surprise of 22.2% last quarter and they could certainly do it again this one.

And as this so-called recovery has dragged on, not only has their growth been phenomenal… their stock price has soared over 79% in the last year….

“With this recession-proof stock on a steep uptrend, the time is right to take a position. As with every stock that’s beginning to soar, you need to get in on this one now.”

This one, sez the Mighty Mighty Thinkolator, is PowerSecure (POWR), a pretty small company (market cap $500 million) that provides services to utilities and their large customers — mostly services to utilities and distributed generation services (including stuff like the storm response teased above, and maintenance of power grids, as well as distributed generation particularly for places like hospitals and data centers[10]). They also have a smaller business (but faster growing) in energy efficiency retrofitting and consulting, and a decent size business in LED lighting.

And for some reason the stock jumped about 6% this morning, I have no idea why. They have a new presentation on their website here from about two weeks ago[11] that provides a reasonable overview of the company. And yes, they did beat earnings estimates by 22.2% last quarter (11 cents versus the nine cent forecast), and the stock is up 80% or so over the last year (it was higher not long ago, up near $25 during a surge that topped out when they announced their earnings in March). They’ve been tacking on relatively small acquisitions to grow the business, particularly in energy efficiency and lighting over the last year, and they seem still quite focused on growth — presumably the dire condition the electric grid is in over most of the country would mean that they’re unlikely to run out of business, but I haven’t heard of the company before today so don’t have much of an opinion on ’em yet.

The last quarterly conference call transcript is here[12], that’s often a good place to get a handle on a company’s plans and challenges. Analysts think they can grow earnings by 60-70% over the next two years, so if they can pull that off you can probably justify the current valuation — steep though it looks at 100X last year’s earnings (if you use forecasts, it looks much better at about 18X 2015’s expected earnings). They don’t have a lot of debt and do have some balance sheet flexibility, so they aren’t teetering on the edge but they are very much being bought as a growth stock so any serious hiccups to that growth would, I expect, hit the stock pretty hard. POWR was actually downgraded in the last week or two by Navellier’s free public portfolio grader from an A to a B, you can see the current rating here.[13]

And one more “Perma-Bull” for you:

“Perma-Bull #3: The High-Flying Airline

“I don’t think I’ve ever seen a more promising airline stock before. I generally avoid them. Why would you want to buy a company that hardly ever runs on time, that is sensitive to fuel costs, that customers always complain about and that has a habit of losing your luggage?

“I won’t say that this company never loses a bag, but I will say that its fundamentals are flying high.

“Perma-bull #3 is a low-fare airline company and it offers services to the U.S., Latin America and the Caribbean.

“In the most recent quarter, the company’s total operating revenue was up 27.9% year-on-year, while adjusted net income increased 109.9%.

“For the next quarter, sales and earnings are expected to grow 18% each.

“All told, the company’s low-cost, ultra-low fare model remains in demand and the company reported record profitability last year. New aircraft are being added to the fleet and shares should continue their 125% 12-month run.”

Thinkolator’s answer: Spirit Airlines (SAVE)[14], which is the latest of the low-cost airlines to reach substantial scale — it’s still pretty small compared to the biggies, but they do have a market cap of about $4 billion now and have been growing fast and adding capacity.

Spirit has been likened to previous generations of cut-rate carriers that slashed amenities and made everything an add-on charge — they’ve also been called the second coming of Ryan Air, the Irish discount carrier that famously contemplated charging customers to use the bathroom a couple years ago. They also got some press for being the most-complained-about airline just recently (they dispute that — with some merit, since the absolute number of complaints to regulators about airlines is so teeny), but they very much stick with the “we’re doing it all to lower prices” mantra, and they’re not about to add a little more legroom or more baggage handlers and raise their prices to pay for them.

Airline stocks in general have often been fantastic for the last couple years as the life of the flying public has been made less comfortable and prices have firmed up — the big airline mergers and a collective move to stop flying unprofitable planes have led the industry to cut down on routes and capacity substantially, leading to full planes, and the relatively flat oil prices over the past couple years have kept fuel cost surprises to a minimum. That reduced capacity and the cattle-car airliners you’ve probably flown on in the last year have brought profits — something most airlines probably didn’t know what to do with when they first hit the income statement.

Investors have learned to hate the industry after so many years of overcapacity and losses, and it’s also been both highly cyclical and very energy-price-dependent in the past. In some ways, the recent outperformance of airlines might be a nice big green flag for the economy — full airplanes mean more people traveling for business, which leads to probably more business being done, and it also means that leisure travelers have more money to spend and more confidence in their checkbook. So against that backdrop, with capacity still quite tight, it might make sense to look at a “real” discount carrier (Southwest, while extremely well managed, is different from the big legacy airlines and more leisure focused like Spirit, but isn’t always cheaper).

SAVE is priced at a big premium to other airlines in some ways, particularly on top line numbers like price/sales (SAVE trades at 2.5X sales, most airlines are valued at less than 1X sales), but they’re also dramatically more profitable (net profit margin is about 10%, almost three times what JetBlue or Southwest earn from each dollar of revenue). Looks kind of interesting, though I have never flown Spirit and probably won’t (they don’t fly where I often go, and the prices I’ve seen for flights I might possibly take weren’t dramatically different from Southwest), but investors (and Navellier) have clearly flagged them as doing something right and filling a needed low-fare niche on many routes. Most of the airlines get “A” ratings from Navellier, no surprise since they’ve all been on a tear in the last year, but it looks like SAVE gets his strongest “A.”[15]

Is that enough to get you rushing to place buy orders for SAVE? (Or, for that matter, for POWR or MTDR?) Or do you have other favorite growth stories, or questions or concerns about any of these stocks? I don’t know any of them very well, but feel free to let your feelings flow with a comment below.

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