With first-quarter U.S. GDP growth falling short of expectations
and few expecting much in the way of broader economic growth for
the rest of the year, investors are once again considering a
troubling question: Where will the growth come from?
In recent months, we have seen some nice growth come from the
housing sector -- real residential fixed investment jumped 12.6%
last quarter after increasing 17.6% in the fourth quarter -- and
some decent growth from the tech sector and auto industry. But in
other areas, growth remains sluggish -- and the government sector
has been contracting sharply. Real federal government consumption
expenditures and gross investment fell 8.4% last quarter and nearly
15% in the fourth quarter.
But while the broader economy continues its muddle-through
advance, many individual companies are putting up some very
impressive growth numbers. And with so many fearful about the
overall economy, a lot of these fast-growing firms' shares are
available for significantly cheaper than they might otherwise be.
My Guru Strategies, each of which is based on the approach of a
different investing great, have been finding a number of them
lately. Here are some of its favorites. (As always, you should
invest in stocks like these within the context of a broader,
MWI Veterinary Supply, Inc. (
This Idaho-based medical equipment small-cap ($1.5 billion) keys on
a very specialized group of end-users: animals. It sells its
products, which include pharmaceuticals, vaccines, parasiticides,
diagnostics, capital equipment, and pet food and nutritional
products, to veterinarians in the U.S. and U.K. It's been a stellar
growth story, increasing EPS and sales in every year of the past
decade. Its long-term sales and EPS growth rates are both 26%, and
sales growth actually accelerated last year to 33%.
MWI gets strong interest from my Peter Lynch-based model. The
Lynch strategy considers the firm a "fast-grower" -- Lynch's
favorite type of investment -- thanks to that 26% long-term EPS
growth rate. Lynch famously used the P/E-to-Growth ratio to find
bargain-priced growth stocks, and when we divide MWI's 26.2
price/earnings ratio by its long-term growth rate, we get a PEG of
0.99. That comes in just under this model's 1.0 upper limit. That's
a sign it's a good buy at its current price, though you should keep
an eye on its price since its PEG is so close to the upper
My James O'Shaughnessy-based growth stock model is also high on
MWI. It looks for firms that have upped EPS in each year of the
past five-year period, which MWI has done. The model also looks for
a key combination of variables: a high relative strength, which is
a sign the market is embracing the stock, and a low price/sales
ratio, which is a sign it hasn't gotten too pricey. MWI has a solid
12-month relative strength of 78, and its P/S ratio of just 0.7
comes in well below this model's 1.5 upper limit.
ResMed Inc. (
This San Diego-based medical technology firm ($6.8 billion market
cap), which makes devices used to treat sleep disordered breathing
and respiratory problems, fell a bit short of Wall Street's revenue
projections in the most recent quarter, but still increased sales
by nearly 10%. Over the long term, it's been growing revenues at a
14% clip, and earnings at a 26% pace, both of which more than
double its industry average.
Given its growth, my Lynch-based model thinks ResMed's 22.3 P/E
ratio is reasonable, as it makes for a 0.85 PEG. In addition, the
company has a debt/equity ratio below 20%, which the model
Panera Bread Co. (
This St. Louis-based bakery/restaurant chain began as an offshoot
of another bakery/restaurant chain, Au Bon Pain. It became so
successful, however, that the company's owners decided to focus
solely on Panera, and sold off the rest of the Au Bon Pain
business. The $5.2-billion-market-cap firm has more than 1,600
locations across the U.S. and Canada.
Warren Buffett is typically thought of as a value investor. But
in her book Buffettology, Mary Buffett (Warren's former
daughter-in-law and colleague) explained that strong, persistent
growth in earnings was a key to Buffett's approach. The model that
I base on that approach likes that Panera has increased earnings in
every year of the past decade, and that its long-term growth rate
is over 23%. The strategy also likes that Panera has no long-term
debt, $4.66 in free cash flow per share, and a 15.5% average return
on equity over the past 10 years.
EPAM Systems Inc. (
While growth in the U.S. has been slow, it's been worse in Europe.
But this I/T firm, which is based in Pennsylvania and provides
software engineering solutions through its Central and Eastern
European service delivery platform, has been a strong grower
despite all the economic headwinds.
EPAM ($1 billion market cap) gets strong interest from the
strategy I base on the writings of Martin Zweig, an exceptional
growth-focused investor who sadly passed away earlier this year. My
Zweig-based model looks for firms whose earnings aren't just
growing, but growing at an accelerating rate, and EPAM delivers.
The firm has grown EPS at an exceptional 81% rate over the long
term (I use an average of the three-, four-, and five-year EPS
growth rates to determine a long-term rate), and an even-better
540% in the most recent quarter. It's also been growing its top
line at a strong pace, with revenues growing at a 33.6% pace over
the long haul and a 32% rate in the most recent quarter. EPAM also
has no long-term debt and trades for a reasonable 17.9 times
trailing 12-month EPS.
Syntel, Inc. (
Michigan-based Syntel provides business analytics, cloud computing,
IT infrastructure management, and other services. The firm ($2.7
billion market cap) has grown EPS at a 20% pace over the long term,
and revenues at a 17% pace.
Syntel gets strong interest from my Buffett-based model, which
likes that it has upped EPS in all but two years of the past
decade, has no long-term debt, and has a 10-year average return on
equity of 28.6%.
My Lynch-based model also likes Syntel. Its 13.8 P/E ratio and
20.0% long-term growth rate make for a solid PEG of 0.69, and the
strategy also likes Syntel's 8.1% debt/equity ratio.
I'm long SYNT, PNRA, EPAM, and MWIV.