Investments that have been successful over the long term almost assuredly share at least one thing in common -- growth. You'll be able to find very few companies that have been unable to increase their earnings and yet still have produced good returns for shareholders.
Think about it this way: Dividends aside, investors reap their gains when a company's stock price goes up. The stock price is typically driven by two levers, earnings and the multiple that investors are willing to pay for those earnings. Since earnings multiples tend to fluctuate within a certain range, long-term investors should have a keen focus on the company's ability to increase earnings.
Does it seem too simple? Maybe keeping it simple is a good plan. After all, as Third Avenue's Marty Whitman has put it:
Based on my own personal experience -- both as an investor in recent years and an expert witness in years past -- rarely do more than three or four variables really count. Everything else is noise.
With that in mind, I've kept it simple and dug up five stocks that analysts expect will notch long-term earnings growth of 10% or better. I've also pulled up the CAPS rating for each stock to show what the 140,000-member Motley Fool's CAPS community thinks of the company's prospects.
|
Company
|
Five-Year
Expected Growth
|
Forward P/E
|
CAPS Rating
(out of 5)
|
|
Yingli Green Energy (NYSE: YGE)
|
37%
|
16
|
****
|
|
Monsanto (NYSE: MON)
|
19%
|
17
|
****
|
|
Google (Nasdaq: GOOG)
|
20%
|
22
|
***
|
|
Synaptics (Nasdaq: SYNA)
|
20%
|
9
|
****
|
|
Sigma Designs (Nasdaq: SIGM)
|
15%
|
12
|
*****
|
|
Moody's (NYSE: MCO)
|
10%
|
14
|
**
|
|
Raytheon (NYSE: RTN)
|
11%
|
9
|
****
|
Source: Capital IQ (a division of Standard & Poor's), Yahoo! Finance, and CAPS.
Wall Street analysts aren't known for being supernatural in their forecasting skills, so not all of these estimates may pan out. However, this list may be a good place to dig in for further research. I'll even get you started with some thoughts on a couple of these stocks.
Cool to the touch?
With a lousy two-star rating and nearly 200 underperform ratings, it's clear that CAPS members have some major reservations about Moody's. And the pessimists aren't mincing words. Check out what CAPS member dcrednek had to say recently when giving the stock a thumbs-down:
David Einhorn of Greenlight Capital has come out publicly to say that he's shorting MCO. The reason is simple: information is beginning to come out that Moody's has been pumping its ratings of CDOs and CMBSs for years, and may in fact still be doing so. Warren [Buffett] has been unloading shares as well. I'm going with the guys who spend much more time following this one. Underperform for the foreseeable future.
The pall of credit ratings gone bad is apparently too much for many CAPS members. And it's hard to blame them. With Uncle Sam on a mission to dig up the misdeeds that led to the financial crisis, Moody's could find itself in the crosshairs.
Bringing the heat
But what about high growth and a high rating from the CAPS community? For that we can turn to Sigma Designs.
Sigma's designs involve smarty-pants microchips known as system-on-chip (SoC) solutions, which are a step up from standard chips and combine hardware horsepower with software brains. While the chips may not be as flexible as, say, the standardized chips that Linear Technology pumps out, they provide oomph behind consumer entertainment products -- and in particular IPTV set-top boxes.
While the recession has been sitting heavily on Sigma's recent results, analysts and CAPS members alike seem to have a very positive view of the company's future. CAPS member rjs157 became one of nearly 1,500 Sigma bulls in August and pointed out that an economic recovery could lead consumers straight to the products that drive Sigma's bottom line:
[Sigma] is a solid small tech company that is a play on a consumer recovery. Their focus is on System on Chip technology that is used throughout the home entertainment systems. Once the economy fully recovers and all the stimulus starts to kick in, the consumer will spend on these items and demand for their technology will increase. They have a strong balance sheet and solid free cash flow, and could [be] a takeover candidate from bigger competitors.
But what do you think?
Do these stocks have what it takes to post solid growth in this economy? Or have analysts been too optimistic? Head over to the free CAPS community and let us know what you think of Moody's, Sigma Designs, or any of the other stocks listed above.
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