Financial websites have given investors more tools than ever to screen the markets for stock ideas. But those screens provide just the raw numbers -- not the story behind them. What might look like the start of a trend could merely be a one-time blip. Let's enlist Motley Fool CAPS to color in the outlines these numbers create.
To find the cream of the crop of large-cap growth stocks that have a solid financial foundation yet trade at reasonable prices, we'll screen for stocks with:
- A market cap of at least $5 billion.
- Price-to-earnings-to-growth (PEG) ratio of less than 1.0.
- Free cash flow of at least $250 million.
- Estimated annual earnings growth of at least 20% for the next five years.
Then we'll tap the collective intelligence of our 83,000-plus CAPS investors to see whether these companies present real opportunities -- or whether they're priced low for a reason.
Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.
|
Company |
Estimated 5-Year Growth |
CAPS Rank (out of 5) |
|---|---|---|
|
NYSE Euronext |
26% |
**** |
|
Schering-Plough |
20% |
**** |
|
Genentech |
21% |
**** |
|
Celgene |
42% |
**** |
|
Broadcom |
21% |
*** |
|
Google |
36% |
** |
Broad-based growth
Further highlighting the perils of simply running a screen based on numerical inputs, communications chipmaker Broadcom popped up on this week's screen with 21% expected growth and a PEG ratio of 0.79, making shares look cheap. But this analysis works off Broadcom's non-GAAP earnings; on a GAAP basis, the valuation looks quite different. In 2007, Broadcom had $0.37 diluted earnings per share under GAAP, but it recorded more than three times this amount, $1.17 in diluted EPS, on a non-GAAP basis.
The discrepancy between the two figures is largely driven by stock-based compensation, which is precisely why the transparency of stock-option costs is so important. In this case, the difference dramatically changes the outlook on valuation of Broadcom. In real cash returns to shareholders, Broadcom is no screaming bargain. Questions of valuation aside, however, investors may still want to evaluate Broadcom for its strong performance and improving earnings picture.
Shares of Broadcom have been battered for a 50% loss since the company reported third-quarter earnings back in October 2007. Even though the company has scored several significant court victories against rival Qualcomm
But with its recent earnings announcement, the company acknowledged to Wall Street that the time is nigh for the heavy spending to pay off; the company will be more prudent with future cost outlays. With this new focus, investors should see margins improve, provided that management can deliver on new design wins and progress with new products.
CAPS investors remain divided on Broadcom's future aspirations, though. Only 89% of investors rating the company believe it will beat the S&P going forward. That leaves a sizeable group, including 14 of the 107 All-Stars rating Broadcom, bearish on the company.
Big growth on the bio-pharm
The large-cap with this week's highest growth expectation is biopharma giant Celgene. Revenue in 2007 soared 56% to $1.4 billion, on a big surge in sales of its Revlimid cancer drug. 2008 is expected to be another year of exceptional growth, as the company commercializes Revlimid internationally for the treatment of multiple myeloma.
But again, while many investors consider Celgene shares on sale, the price looks cheaper than it really is -- thanks largely to stock options. On a GAAP basis, Celgene's diluted EPS for 2007 was just $0.54, but with adjustments backing out option-related costs and other extraordinary items, that figure almost doubles, to $1.06 per share. Still, with dramatic growth expected in 2008 earnings and beyond, Celgene's forward prospects look bright, despite its risks. A total of 851 out of 900 CAPS investors rating the company agree, giving it the thumbs-up to beat the market going forward.
Let 83,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury. Fools should always perform their own research.
Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base, and share your own opinion, in Motley Fool CAPS.
