In fits and starts, the U.S.economy appears to be gaining
Recent economic reports have been giving mixed signals -- the
consumer is feeling better while manufacturers retrench a bit --
but on balance, the recent trends hint atGDP growth in excess of
2.5% in the second half of thisyear and perhaps near 3% by next
year. The challenge for investors is to find companies that are
poised to grow in tandem with the economy.
I screened every company in the S&P 400, 500 and 600, looking
for companies that have recently seen their 2013earnings per
) outlooks boosted and are now expected to boostEPS by at least
20% in 2014 and again in 2015. Two industries are heavily
represented in this group: energy and housing.
Housing Industry Profits Are Set To Rise
Anticipated strong profit growth may already be reflected in
alot of thesestocks . The PHLX Housing SectorIndex has risen from
80 in October 2011 to a recent 209. And some question whether the
housingmarket is truly poised for better days ahead, expressing
concern that an eventual rise inmortgage rates or an unleashed
supply of homes coming out offoreclosure will dampen recentgains
in housing prices.
You'll also find a brightening profit picture in the oil and gas
industry, thanks in part to firming natural-gas prices. Higher
prices have boosted the cash-flow prospects of energy producers
and strengthened demand for equipment providers alike.
Yet another two dozen companies outside of energy and housing
are poised for solid profit gains. In a bid to pair growth with
value, I narrowed this group to any stocks trading for less than
15 times projected 2015 profits. In effect, these companies have
aPEG (theP/E ratio divided by theearnings growth rate) ratio well
These companies are generating profit growth through either
organic top-line growth or impressive cost controls.
For example, take biotech firm
Celgene (Nasdaq: CELG)
. At the end of 2012, Celgene met withanalysts and explained how
its current pipeline of drug candidates should help the company
generate nearly $10 a share in EPS by 2016. Analysts went home,
crunched the numbers and quickly started gushing about thestock ,
resulting in a 58%gain in the stock thus far this year.
Huntington Ingalls (
is taking the opposite tack:Sales are barely budging as plans to
build new ships get pushed out, but a focus on expenses has led
management to predict that operating margins will rise from 5.3%
in 2012 to 9% by 2015.
Running through the stocks on the table above, a few other names
stand out as being both timely and a good value.
1. Calgon Carbon (
This company provides equipment used to scrub power plants of key
airborne pollutants or disinfect both drinking water and
wastewater. A tightening regulatory environment is providing a
lift to both segments. Demand for air-scrubbing carbon spiked
nicely higher as power plants were retrofitted to cut emissions
of mercury, sulfur dioxide and other airborne pollutants.
And the company's UV-based water-filtration systems is now
starting to see firming demand as well, especially in the
maritime industry. The EPA now requires all ships that navigate
U.S. waters to implement ballast-water treatment systems
To be sure, neither segment will ever be a fast grower. But
moderate growth, coupled with steadymargin gains, is helping to
deliver fairly robust bottom-line growth. Per-share profits are
expected to rise at a solid clip in 2013 and 2014 and then really
take off in 2015 as those regulations start to tighten further.
Insupport of the brightening outlook, a pair of company directors
recently acquired a collective $250,000 in company stock at an
average price of $17.30.
2. Pentair (
This company has a slightly similar focus, making water-quality
processing equipment, along with other flow-control gear. Like
Calgon Carbon, organic growth is unimpressive, but a recentmerger
with the flow division of
Tyco International (
is helping to sharply boost margins. Pentair is applying its lean
manufacturing techniques to many of the Tyco factories, which is
setting the stage for solid bottom-line growth.
After digesting a recent quarterly earnings report, analysts at
Citigroup noted, "Although it is only its second quarter as a
merged company, management is already ahead of schedule on cost
synergies and raised its 2013 costsynergy target from $90 million
to $100 million, adding confidently that it has already
identified all of the savings targets."Shares have begun to
strengthen but still trade for just 12 times projected 2015
Risks to Consider:
The projected profit gains for these companies are largely
predicated on a firming U.S. economy, and as a result, would
likely be subject to downward earnings revisions if the economy
began to cool.
Action to Take -->
As noted with the Celgene example, investors crave growth and
predictability. Companies with erratic profit growth will always
be penalized, but these steady profit growers looked poised to
move higher if the U.S. economy continues to strengthen.