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Stocks Rise for Two Reasons: Earnings Growth and Multiple Expansion

We spend a lot of time talking about earnings growth... and with good reason! Growth generates cash flow and drives returns.

We spend less time however, talking about the other key driver of stock performance: multiple expansion. When earnings growth accelerates, investors "pay up" for higher future cash flows and multiples expand.

The team at Strategas Research Partners ( highlights the balance between the two in their morning note. They analyzed ten bull markets of the past 60 years, and determined multiple expansion has generally accounted for about 70 percent of returns; earnings growth just 30 percent.

The current rally (bar on the far right) has been driven more by earnings growth than multiple expansion. This suggests further gains are more likely driven by investors' willingness to pay a higher multiple rather than by growth itself.

So today we identify stocks which are growing and appear to have more room to run. Specifically, we focus on S&P 500 companies where every analyst has raised 2014 earnings estimates and P/E ratios are LESS than the market average... call them multiple expansion candidates.

Fifteen well-known companies across multiple sectors made our list:

The group of fifteen is up 40.1 percent YTD, so clearly investors appreciate the combined appeal of earnings growth and low relative valuation. We think these stocks will continue to gain as investors pay up for "growth at a discount."

THIS is multiple expansion.

For the benefit of blog readers, we share several additional names which narrowly missed our list... they're trading at slight premiums to the market: Gamestop (GME), Hasbro (HAS), McKesson (MCK), TJX (TJX), Tyco (TYC).

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