| Companies
With Growing Earnings but Declining Share Prices |
Published: January 11, 2005
In most cases, strong growth
and solid share price performance go hand in hand. After all, companies
are valued based on present and future earnings. Therefore, firms with
solid historical earnings performance and decent growth prospects
usually attract investors' attention.
However, the market isn't
always a perfect discounting mechanism. Sometimes Wall Street ignores
promising companies with steady long-term fundamental performance. On
rare occasions, stocks can actually decline even as the underlying
company's earnings continue to ramp higher. These ignored and unloved
gems can provide rare opportunities for investors, giving them a chance
to buy quality companies with excellent long-term prospects on the
cheap. Inevitably, Wall Street eventually catches on to these solid
long-term growth stories, amply rewarding those with the foresight to
buy these unloved stocks before they post big moves.
If
that sounds too good to be true, consider the case of Simon Property
Group (SPG), a real estate investment trust (REIT) that owns a portfolio
of shopping malls around the U.S. Back in early 1997 SPG was trading at
just under $30 a share. Less than three years later in late 1999, the
REIT was trading at less than $20. Even taking into account SPG's
healthy dividend yield, the stock showed a negative return despite the
fact that the S&P 500 soared to new historic highs during this time
period.
But as you can see in our
chart, even though the stock sold off sharply in the late 1990s, SPG's earnings
performance never sagged during this time period. In fact, from the end of 1996 through
1999, SPG's net income soared nearly +140%. Over the same time period,
the firm's funds from operations (FFO) -- a popular measure of true operating earnings
for REITs -- jumped over +154%. Not surprisingly, SPG
hiked its dividend payout on several occasions over this three-year
period.
It
was only in 2000 that investors began to take notice of the firm's
strong fundamental performance. As you can see from our chart, the stock
soared from around $20 in early 2000 to nearly $65 by the end of 2004 --
a more than +200% gain. But that's just the beginning of the story --
taking into account the firm's solid annual dividends, the stock
actually delivered a total return of better than +250% over this time
period. That return is even more impressive when you consider that the
overall market (as measured by the S&P 500) actually declined in value during this time frame.
With this in mind, my staff and
I recently devised a screen to identify companies with strong
fundamental performance and solid growth prospects but weak share
prices. In the process, we combed through our
database of over 10,000 securities in search of stocks
with the following characteristics:
52-Week Price Change <
0%
My staff and I looked for companies that have seen falling share prices
and have underperformed the S&P over the past year.
3-Year Annualized EPS
Growth > 17.5%
Over the past three years, the average S&P 500 component has shown
EPS growth of around +12.5%. In today's screen we searched for
companies that have delivered significantly faster earnings growth than
the market average. In this case, we narrowed our list down to companies
that have grown at least +5% faster than the average S&P 500 stock.
Trailing 12-Month EPS
Growth > 20%
Although long-term earnings performance is important, we also wanted to
ensure that performance was solid over the past year. Based on
preliminary fourth-quarter estimates, the average S&P 500 component
posted earnings growth of around +19% in 2004. With this in mind, we
searched for companies that delivered stronger-than-average earnings
growth of +20% or more last year.
Trailing 12-Month
Operating Margin > 10%
We want to invest in companies that are not only growing, but that are
also showing decent profitability. Profit margins measure how much money
a company makes out of every dollar it receives in sales. Meanwhile,
operating margins exclude certain unusual, non-operating cash earnings
items from the calculation, making this a solid measure of a company's
core profitability. As a general rule of thumb, stocks with operating
margins over 10% tend to exhibit strong profitability.
Long-Term Estimated EPS
Growth > 15%
Stocks are priced primarily on expected future earnings, not historical
earnings. With this in mind, it's not enough to look exclusively at past
earnings performance -- future growth is even more important. Therefore,
we also narrowed our list down to companies with projected long-term
earnings growth of at least +15%, well above the long-term average for
the S&P 500.
Below you'll find a summary of
all criteria we incorporated into today's screen for beaten-down stocks
with strong earnings growth and profitability:
-- Price above $5 per share
-- Market capitalization above $100 million
-- Three-year annualized EPS growth above +17.5%
-- Long-term EPS growth estimates above +15%
-- Trailing 12-month EPS growth of greater than +20%
-- Operating margin above 10%
-- 52-week price change less than 0%
After running the above
criteria through StreetAuthority's advanced screening software, we came
up with the following list of companies (all prices are as of the close
of trading on Friday, January 7th)...
| Company
Name (Symbol) |
52-Week
% Change |
3-Yr
Ann. EPS Growth |
LT
Growth Est. |
| Orleans
Homebuilders (OHB) |
-26% |
49% |
15% |
| Forest
Laboratories (FRX) |
-41% |
49% |
18% |
| Advanced
Neuromodulation (ANSI) |
-14% |
122% |
28% |
| Xilinx
(XLNX) |
-32% |
104% |
22% |
| Bed Bath &
Beyond (BBBY) |
-4% |
31% |
20% |
| ITT
Educational Services (ESI) |
-5% |
31% |
20% |
| Metrologic
Instruments (MTLG) |
-32% |
63% |
24% |
| ADE
Corporation (ADEX) |
-13% |
55% |
20% |
| Boston Comm.
Group (BCGI) |
-8% |
60% |
20% |
| Education
Management (EDMC) |
-5% |
30% |
20% |
| SS&C
Technologies (SSNC) |
-17% |
87% |
23% |
| eResearch
Technology (ERES) |
-34% |
347% |
21% |
| SeaChange Int.
(SEAC) |
-12% |
268% |
26% |
| Macrovision
Corp. (MVSN) |
-12% |
31% |
18% |
| FARO Tech.
(FARO) |
-3% |
444% |
27% |
| Career
Education (CECO) |
-15% |
61% |
23% |
| Taiwan Semi.
(TSM) |
-21% |
18% |
24% |
| Ditech
Comm. (DITC) |
-35% |
97% |
28% |
| Silicon Lab.
(SLAB) |
-35% |
44% |
26% |
| Berkshire
Hills (BHL)) |
-4% |
34% |
15% |
| Coca-Cola
Hellenic Btl'g (CCH) |
-1% |
68% |
15% |
Many of the stocks in this
screen look like interesting investment candidates. Here's a closer look
at a few of our favorite investment ideas from the list above...
Important
Note: To view the remainder of this article, in which
StreetAuthority.com founder Paul Tracy and his staff provide an in-depth
analysis of several of their top picks from the list above, you'll
need to subscribe to our premium Market Advisor
newsletter. Please visit one of the following links to continue...
|
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