Since I'm a member of the Rule Breakers newsletter 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 going over lists of heavily shorted stocks than those hitting fresh 52-week lows.
Despite all this, I am no spendthrift. I am 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 price-to-earnings ratio multiples. What happened? Earnings crashed, multiples expanded, 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. 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 the first 2007 earnings season is shrinking in the rearview mirror, we're starting to get a handle on forward estimates for fiscal 2008. Let me run a few names past you. Tell me if you thought they were trading for higher forward multiples than they actually are.
|
Recent Price |
2008 EPS |
2008 P/E |
|
|---|---|---|---|
|
Shanda Interactive |
$27.94 |
$1.61 |
17.4 |
|
CheckFree |
$37.99 |
$2.11 |
18.0 |
|
Digital River |
$50.00 |
$2.69 |
18.6 |
|
Citrix Systems |
$32.99 |
$1.76 |
18.7 |
|
j2 Global Communications |
$31.67 |
$1.67 |
19.0 |
Growth stocks with 2008 profit multiples running in the teens may not seem cheap at first glance, but dig a little deeper to appreciate what some of these companies are doing.
Shanda has its groove back as the pioneer in Internet multiplayer fantasy games in China. Checkfree and Digital River are e-commerce enablers that will only continue to grow as the world warms to Web-based transactions. Citrix and j2 are also playing starring roles in the world of cyberspace commerce.
All five companies are growing, with analysts expecting healthy advances come next year. With other Internet-empowering companies like aQuantive
These are important growth stocks, yet they are fetching multiples that would seem like a better fit with sleepy utility stocks or predictably steady money-center banks. So, how can these not be the cheapest stocks you know, too?
I'm sorry. They're affordable.
Buying the right kind of growth stock
The companies I consider cheap -- heck, I demand they 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 will find:
- A fast-growing software company trading at just 18 times next year's earnings.
- An airport security specialist fetching just 20 times forward profitability.
- One of the five stocks that I mentioned earlier -- Shanda Interactive -- that continues to have a bright future, and does, in fact, 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 $19.24 per share come 2008. Those who got into Google early snapped up a stake in the paid search giant for just 4.4 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 seem to have much of a line these days. Pucker up, my friend.
Shanda Interactive and aQuantive 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 offer.
This article was originally published on Feb. 15, 2007. It has been updated.
Longtime Fool contributor Rick Munarriz does not own shares in any of the companies mentioned in this story, even though he recognizes that nearly all of the 50 states ban marriage between a man and a stock. 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.
