Five Stocks That Combine Best of Growth, Value: John Dorfman
Growth and value investors think of themselves as proud rivals.
Value investors, who prefer cheap stocks, often view the growth crowd as rainbow chasers. Growth investors, who look for fast rising earnings, may see value folks as stodgy.
Neither camp might like to admit it, but the best stocks chosen by managers of either stripe usually are ones that show characteristics of both growth and value.
For those investors who don’t let school pride (pride in their school of investing, that is) overwhelm all other issues, here are some stocks that have a foot in both camps. To find them, I ran a Bloomberg equity search combining the following characteristics:
-- U.S. based companies with a market value of $500 million or more;
-- annual earnings growth averaging at least 10 percent for the past five years;
-- a stock price no more than 15 times the past four quarters’ earnings;
-- debt less than stockholders’ equity, to reduce the risk of bankruptcy or severe financial strain;
-- and a favorable earnings surprise in the latest reported quarter, a useful filter because stocks advance by exceeding prevailing expectations.
Only 41 stocks passed those tests as of July 7. From that group I chose five to recommend, striving for a balance among industries and omitting companies I have written about within the past six months.
Polo Ralph Lauren Corp., a New York-based company that designs and sells apparel, home furnishings, accessories and fragrances has averaged 22 percent earnings growth the past five years. The company sells its products in its own stores, in department stores such as Macy’s and online.
Next month, the retailer plans to start selling Lauren brand handbags. This puts it head-to-head with Coach Inc., the No.1 U.S. maker of luxury handbags. My view: Coach is well run, but Polo can probably undercut it on price and win market share.
U.S. retailers’ sales are growing at the fastest pace in four years, according to the International Council of Shopping Centers. That suggests to me that analysts are wrong in thinking that Polo is going to suffer a small earnings decline this fiscal year. It has shown rising earnings six years in a row.
Moreover, the company has shown a profit every year since it went public in 1997. It had a price-earnings ratio of 15 on July 7 yet a few days of share price gains caused its ratio to nudge up to almost 16. At the current price of about $77, I think it is attractive, but I would try to buy if it drops to less than $73.
Tupperware Brands Corp. doesn’t get much investor respect, perhaps because its wares are sold through house parties that resemble coffee klatches. Analysts like Tupperware, and 10 of the 13 who cover the company rate it a “buy.” Investors, though, are lukewarm -- hence the multiple of only 13 times earnings.
Maybe investors should take a second look: Tupperware’s sales grew to $2.1 billion last year from $1.2 billion in 2004 while earnings advanced to $175 million from $87 million.
I think many people also underestimate Tupperware’s international scope. Though based in Orlando, Florida, the company gets only 14.5 percent of its sales from North America. Asia generates more revenue for Tupperware than the U.S. does, and Europe delivers more than twice as much.
Atlas Air Worldwide Holdings Inc. is out of favor for a different reason. The Purchase, New York-based company is a major air freight carrier and also does charter flights for companies and the U.S. military.
Naturally, Atlas is cyclical, rising and falling with the tides of the economy. Investors distrust the economic recovery, fearing that it soon will fizzle. So they accord Atlas a multiple of only 14 times earnings and slightly more than one times revenue.
Since I am more bullish on the U.S. economic recovery than most of my compatriots are, I think the stock should do well. Also, many Asian economies are strong now, and Atlas gets almost half of its revenue there.
Next I’ll mention an old favorite, Powell Industries Inc. The company, located in Houston, makes large-scale electrical equipment used by utilities and refineries, and also builds ventilation systems for highway tunnels.
Powell claims to offer more customization and client service than its larger rivals do. Based on meetings with company executives and my own research, I believe that claim.
Powell is dirt cheap, trading at eight times earnings, 0.5 times sales and 1.2 times book value (assets minus liabilities per share). The stock is down about 12 percent this year, but undeservedly so in my view.
After jumping 157 percent in 2008 and 52 percent in 2009, earnings are expected to decline 32 percent this year, to $2.33 a share. Yet that would still be Powell’s second-best year.
Let’s conclude with J.M. Smucker Co. The company, located in Orrville, Ohio, makes Folger’s coffee, Smucker’s jam and a variety of other food products. Its earnings per share have grown an average of 13 percent annually in the past five years, and the latest 12 months saw a 33 percent rise in profit.
Even with the company’s success, investors aren’t enthralled with Smucker as they are with, say, gold stocks. So you can pick up the shares for a reasonable price, 14 times earnings.
Disclosure note: I own shares of Powell Industries personally and for clients. I have no long or short positions in the other stocks discussed in this week’s column.
(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)
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