As a member of the Rule Breakers research team, few will confuse me for a deep-value investor. I prefer turnover to turnarounds. I define the C in DCF as "catalysts." I find more investing ideas in lists of heavily shorted stocks than among the fresh 52-week lows.
Despite all this, I am no spendthrift. I'm passionately cheap. The catch is that I see great prices in growth stocks. I think that's important. Value investors may have been jumping all over real estate developers last summer when they seemed to be trading at single-digit P/E multiples. What happened? Earnings crashed, multiples contracted, and homebuilder stocks fell even further.
I prefer to hitch my portfolio's wagon to stocks that are growing. You can try your luck at nailing the top and bottom of cyclical stocks, but I won't. Why should I, when there are just way too many bargains out there from stocks that have consistently delivered the goods?
Five for the road
Now that we're wrapping up 2008, we're starting to get a handle on forward estimates for fiscal 2009. Let me run a few names past you. Tell me if you thought they were trading for higher forward multiples than they actually are:
|
Company
|
Recent Price
|
Next Year EPS
|
Forward P/E
|
|
Akamai (Nasdaq: AKAM)
|
$13.35
|
$1.77
|
7.6
|
|
Take-Two Interactive (Nasdaq: TTWO)
|
$10.69
|
$1.37
|
8.2
|
|
JAKKS Pacific (Nasdaq: JAKK)
|
$19.84
|
$2.94
|
6.7
|
|
Priceline.com (Nasdaq: PCLN)
|
$54.99
|
$5.85
|
9.5
|
|
Research In Motion (Nasdaq: RIMM)
|
$43.80
|
$4.68
|
8.9
|
Data from Yahoo! Finance.
Finding growth stocks with 2009 profit multiples running in the single digits isn't necessarily cheap in of itself, but dig a little deeper, and you can appreciate what some of these companies are doing.
Akamai remains the leader in content delivery networks, serving up pages and files quickly and securely. Take-Two scored big with this year's release of Grand Theft Auto IV. JAKKS Pacific is heading into the holidays after putting out one of last season's best-selling toys. Priceline keeps growing faster than its cookie-cutter travel portal rivals. Research In Motion's BlackBerry is still the leading smartphone on the market.
All five companies are growing, with analysts expecting healthy advances beyond that. If you're looking for blue chips, networking equipment giant Cisco (Nasdaq: CSCO) is now fetching just 11 times next year's earnings. Tech bellwether IBM (NYSE: IBM) is now fetching a forward earnings multiple in the single digits.
These are growth stocks, yet they are fetching multiples that seem a better fit with sleepy utility stocks. So how can these not be the cheapest stocks that you know, too?
I'm sorry: They're affordable.
Buying the right kind of growth stock
The companies that I consider -- heck, demand to be considered -- cheap are growing at incredible rates, yet they're priced as if they were only modestly above average. They also have a history of blowing past analyst profit targets, so the forward-looking estimates have a pretty good chance of being revised higher in the coming quarters.
That's where I want to be. Yes, Rule Breakers is a growth-stock newsletter service. Dig deep into the scorecard and you'll find:
- Two of China's biggest online multiplayer game makers, with ridiculously wide profit margins, trading for just nine and 11 times next year's projected earnings.
- A luxurious pampering-services specialist fetching just eight times forward profitability.
- Two of the five stocks I mentioned earlier -- Akamai and Take-Two -- continue to have bright futures; in fact, they look cheap in my book.
Growth stocks are the greatest value stocks I know. Remember when Google went public at $85 in the summer of 2004? Did you think it was overpriced at the time? If so, you weren't alone.
But no one knew that the company was positioning itself to earn $22.39 per share come 2009. Those who got into Google early snapped up a stake in the paid search giant for just 3.8 times next year's profits.
Getting in early on the right growth stocks is the key. Just your luck -- the growth-stock kissing booth doesn't have much of a line these days. Pucker up, my friend.
Akamai, Google, and Take-Two are Rule Breakers picks. If you want to unearth the other "potentially cheap" stocks in the newsletter, punch in now for a free 30-day trial.
This article was originally published Feb. 15, 2007. It has been updated.
Longtime Fool contributor Rick Munarriz does not own shares in any of the companies in this story. Priceline is a Stock Advisor recommendation. Rick is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
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