7 Stocks With Exploding Profits on Sale

We're all on the lookout for great stock picks. In a perfect world, investors would get great companies trading for bargain-basement prices. However, the market rarely works that way. Great companies seeing strong growth most often trade for extremely high P/E multiples; you have to pay up for the possibility of outsized growth. Likewise, companies with bargain basement P/Es are often the result of recent sluggish growth -- and trouble ahead.

But what if we could have the best of both worlds? I set a list of criteria seeking out companies that weren't only bargain priced but also had strong recent earnings and revenue growth and a history of earnings growth rates that smashed market averages.

This wasn't an easy benchmark for stocks to reach; out of the 1,926 stocks that are worth at least a billion dollars and listed on U.S. exchanges, precisely seven companies fit my criteria. That's an exacting enough standard that only 0.4% of stocks pass the test!

Finding high growth and cheap share prices
So, what exactly was I searching for?

  • Normalized net income growth of at least 35% in the past year. Using a normalized figure helps weed out stocks that have been cheapened by artificially low tax rates coming out of the recession.
  • Revenue growth of at least 25% in the past year. I want to see strong top-line growth illustrating that the company is doing more than just cost-cutting to show growth. We're looking for companies that can sustainably keep growing.
  • A normalized P/E of less than 10. P/Es less than 10 are generally considered the zone where companies are priced for no future growth.
  • A five-year compounded net income growth rate of 15%. Setting a long-term net-income growth rate helps weed out flash-in-the-pan companies that rebounded strongly out of the recession but haven't been able to grow over the years.

7 stocks passing the test
After setting these criteria seeking out fast growers trading on the cheap, only seven stocks remained:

Company

Quick Description

Normalized Trailing P/E

Central Fund of Canada (AMEX: CEF  )

Closed-end commodity fund

3.0

Grupo Financiero Galicia S.A. (Nasdaq: GGAL  )

Argentinean bank

9.7

Suntech (NYSE: STP  )

Chinese solar company

6.6

KKR Financial (NYSE: KFN  )

Emphasis on investment in corporate debt

7.8

Vale (NYSE: VALE  )

Brazilian miner with high exposure to iron ore

7.9

MKS Instruments (Nasdaq: MKSI  )

Components to the semiconductor equipment industry

9.7

Avnet (NYSE: AVT  )

Technology distributor

9.0

Source: Capital IQ, a division of Standard & Poor's.

There's a little bit of something for everyone here, with industries spanning the globe. However, the market's not just handing out deals here; the stocks are cheap for a reason, having caveats or warts to go along with their cheap share prices:

  • Central Fund of Canada is a closed-end fund that's trading for a miniscule three times earnings. On paper, that's a blockbuster deal! However, the profits are just that -- on paper. Earnings in the last year were from unrealized gains in the company's gold and silver holdings.
  • Despite recent profits, Suntech Power has a shaky balance sheet loaded with debt and faces continuing competition from rival low-cost Chinese peers.  Its situation is also difficult to get a handle on because the company is shifting assets and debt to a new joint venture, obscuring the company's true financial state.
  • MKS Instruments sells components to large semiconductor equipment makers like Applied Materials. The company has been extremely profitable lately, but consolidation in the industry means that its future is increasingly in the hands of a few key customers.

And the list goes on.

The challenges present opportunity
However, challenges ahead were expected. The purpose of screening out these companies is to "sort through the trash," find companies priced for no growth that have a history of moving through a challenging environment (the recession) and coming out better on the other side. If the market's overly bearish on their future, you can be well-rewarded in the years ahead even if these companies only eke out a fraction of their past five-year growth rates.

One to watch
So what companies look attractive? Several look deserving of more attention, but here's one I'm taking a closer look at:

Vale
One trend I found while seeking out high-growth, low P/E companies was that most were centered abroad, specifically in China. If I eliminated requiring stocks listed on U.S. exchanges and searched stocks from around the world, 30 of them met my criteria. And 43% of those 30 were Chinese. That's partially the result of recent Chinese governance scandals and fraud allegations, but it's also a reflection on investor fears about Chinese growth.

With Vale being a key supplier of the iron ore that's at the center of China's insatiable build-out, these fears have struck the stock. However, the company also has a fall back with a domestic infrastructure build-out ahead of several notable events such as the 2014 World Cup and 2016 Olympics.

That's not to say fears over China should be discounted; the majority of shipped iron ore heads to China. However, of Vale's total sales, only 33% is shipped to China. That's a very heady number for sure, but it's one that can be buffered in part by growing domestic demand. Last year, domestic revenues increased 98%, far outpacing growth in China.

Vale's ridden a wave of emerging market growth to its fantastic past results. While its amazing growth rates of the last decade are over, the stock is priced as if there's no growth ahead of it. If you're underweight on emerging market stocks, or believe China and Brazil's growth is likely to continue and want a way to play the trend, Vale looks intriguing at today's prices.

Keep searching
Vale's not the only stock surging from emerging market demand for commodities. While Vale has seen its fortunes soar thanks to a call for iron ore, ravenous demand for resources has also pushed oil near $100 a barrel. If you're looking to continue your search for companies benefiting from this trend, The Motley Fool recently created a free report titled "3 Stocks for $100 Oil" that lists three companies best positioned to capitalize on climbing energy prices. The report's 100% free, and you can pick up a copy by clicking here.

Eric Bleeker owns shares of no companies listed above. Try any of our Foolish newsletter services free for 30 days. The Fool owns shares of Applied Materials. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (51)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2011, at 12:09 AM, jekoslosky wrote:

    I owned VALE for a while a year or two back and sold to free up some cash after a nice run. Hasn't done much since, but maybe it's time to put it back on my radar screen.

    Here's what I own now: http://bit.ly/iUPcpf

    Most recent buys AAPL and BRK.B

  • Report this Comment On June 20, 2011, at 12:38 AM, TimothyVR wrote:

    That is an interesting comment about the percentage of Vale iron ore going to China. You're right - 33% is significant, but it is not the only market. That domestic market is soaring. I had thought the China number was much higher.

    I own Vale and it has been flat for a while now - hopefully the growth will pick up soon as Brazil continues to boom, even as China slows.

  • Report this Comment On June 20, 2011, at 9:28 AM, mikecart1 wrote:

    The articles is misnamed. It should be called "7 Companies With Exploding Profits on Sale". This site often confuses a stock with a company and a company with a stock. Companies that do well often are not the best performing stocks.

  • Report this Comment On June 20, 2011, at 2:49 PM, TMFRhino wrote:

    Hey TImothy,

    Yeah, I used to own Vale. Sold it at about $34, which turned out to be a prescient move, but after doing more digging on the stock I could see myself adding it again. I was a bit concerned with their expense structure shipping to China and also that Chinese construction growth would slow even as the economy would keep growing at 8-11%, but with continuing results, some shifts in domestic demand trends, and the stocks hovering around 30... Seem to be well compensated at this level. Plus, I don't have a lot of EM exposure currently.

    Mikecart1,

    Sorry, we'll try to be more consistent with our naming conventions.

    -Eric

  • Report this Comment On June 21, 2011, at 5:28 PM, 34985LA wrote:

    Note of caution for investing in Argentina. I was ther six months ago and Buenos Aires was on the verge of anarchy. People were squatting wherever they felt - abandoned apartment buildings, front lawns, demanding power, water and food from the govt and private enterprise and getting it. They were blocking major thoroughfares, demanding they be fed. Glad to be out of there.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1508731, ~/Articles/ArticleHandler.aspx, 9/16/2014 7:50:50 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement