Color to the Numbers: Top Bargain Growth Stocks

Thanks to the Internet, and sites such as Yahoo! Finance and MSN Money, investors have more tools than ever to search for stock ideas by running screens. But screens often return numerous stocks that need to be weeded out, because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments, not core operations, for instance.

Just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen isn't clear until we add the appropriate hues. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to look at a screen for bargain growth stocks.

Better a screen than a window
In CAPS, investors can see how the collective community rates a company and can compare that rating with the opinions of the very best All-Star stock pickers -- CAPS players with a ranking greater than 80. There are even pitch commentaries and blogs to lend detail to the bull and bear opinions. In all, CAPS gives investors qualitative resources far beyond mere numbers and tables.

To run our bargain growth screen, we'll use the following criteria:

  • Price-to-earnings-to-growth (PEG) ratio of no more than 0.75.
  • Projected earnings growth for the next five years in excess of 25%.
  • Annual revenue of at least $100 million.
  • Free cash flow of at least $30 million.

This should give us the cream of the crop in terms of stocks with powerful earnings growth still trading at a decent price. Of course, there may be very good reasons why these companies trade at low multiples. This is where CAPS can really help.

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

Company

Projected Earnings Growth (Next 5 Years)

CAPS Rating (out of 5)

Joy Global (NASDAQ:JOYG)

33%

*****

Teletech Holdings (NASDAQ:TTEC)

27%

*****

First Marblehead (NYSE:FMD)

50%

*****

Dril-Quip

33%

*****

AMR (NYSE:AMR)

26%

*

Data from Yahoo! Finance screener as of Nov. 21. CAPS ranking provided by CAPS.

Student of finance
One of our highly rated bargains is what some would call a "special situation" stock that has lost almost 50% of its value so far this year. Student-loan servicer First Marblehead is under pressure, facing the potential loss of a good chunk of its business from Bank of America and JPMorgan (NYSE: JPM  ) . First Marblehead is part of a group currently locked in a legal battle to scuttle the acquisition of Sallie Mae (NYSE: SLM  ) . Should the banks be forced to stick to their offer of $60 per share for Sallie Mae or agree to some other deal, investors fear much of First Marblehead's revenue would be in jeopardy.

Another negative is found in the form of recent legislation making its way through Congress, which seeks to put curbs on student loan lending practices. But CAPS investors largely believe First Marblehead will survive the current crisis and thrive in the long term. The company thinks so, too, as it has continued to buy back shares and raise its dividend each quarter this year. Fellow Fool David Meier even sees First Marblehead as the next big bargain on sale today. CAPS investors tend to agree, with 97% of investors who have rated the company believing it will beat the S&P going forward.

Putting the joy back in investing
For a long time, mining equipment manufacturer Joy Global was one of those winners nobody knew about -- that was, until the stock had appreciated more than tenfold over the past five years. Rapid growth in the company's business of providing open-pit and underground mining equipment is being driven by booming demand for basic commodities around the world.

CAPS investors are largely bullish, with 209 of the 214 All-Stars rating the company giving it the thumbs-up. Many of the same investors also show favor for many miners, such as Freeport-McMoRan and Companhia Vale do Rio Doce (NYSE: RIO  ) . A good contingent of analysts believe the demand for coal, copper, and iron ore from burgeoning economies like China and India will continue as well, estimating that Joy Global will see 33% growth in the next five years.

Let 75,000 investors be the judge
Stocks that have been beaten down to bargain levels can be difficult to judge, especially when you're just "running the numbers." Thankfully, the collective wisdom of a huge pool of investors can quickly add color to the outlines. But even with an entire community of qualified opinions acting as the judge, individual investors should still perform their own research.

Want to see your favorite screen results get run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion. Check out Motley Fool CAPS for yourself.


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