Markets
TCX

Finding Growth In A Low-Growth World

An image of stocks on a display
Credit: Shutterstock photo

The American economy grew at a lackluster 0.5% pace in the first quarter, according to new government data - a disappointing but not entirely surprising figure. Sluggish growth has been one of the defining characteristics of the economic expansion that began back in mid-2009. The highest annual growth rate measured in the expansion: a mere 2.5%, back in 2010.

Of course, one thing this expansion has taught us is that GDP growth and stock market returns do not always go hand in hand. The bull market that began shortly before the economy turned around in 2009 has been one of the longest and most dramatic of our lifetimes, with the S&P 500 up more than 200%. Economic cycles and bull/bear markets do tend to begin and end reasonably close to each other. But the performance of the stock market depends not only on economic factors, but also the valuation levels when a new market cycle starts, interest rates, and expectations.

In addition, while the broader economy continues its muddle-through advance, many individual companies are putting up some very impressive growth numbers. The trick is to get them at the right prices. Because overall growth has been lacking in recent years, investors have been willing to pay a high price for companies that can produce it. That, I believe, is one of the reasons why growth stocks outperformed value stocks over the past several years, and one reason why many growth stocks have become very pricey. But if you look closely, you can still find some attractive growth plays selling at reasonable valuations. Recently, I used my Guru Strategies, each of which is based on the approach of a different investing great, to search for some of them. Here is a sampling of what I found. (As always, you should invest in stocks like these within the context of a broader, well-diversified portfolio.)

NVR, Inc. ( NVR ): NVR builds single-family detached homes, townhomes and condominium buildings, and also operates a mortgage banking and title services business. Its homebuilding business operates under four trade names: Ryan Homes, NVHomes, Fox Ridge Homes and Heartland Homes.

NVR ($6.5 billion market cap), which increased earnings per share by more than 40% last year, gets strong interest from the model I base on the writings of quantitative investment guru James O'Shaughnessy. It looks for firms that have upped earnings per share in each year of the past five-year period, which NVR 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. NVR has a solid 12-month relative strength of 86, and its P/S ratio of just 1.25 comes in below this model's 1.5 upper limit.

Tucows Inc. ( TCX ): Toronto-based Tucows provides a range of Internet services, including wholesale and retail domain name registration, high speed Internet access, Internet hosting and network consulting, and the sale of retail mobile phones and services via Ting Mobile. Its brands include OpenSRS, YummyNames, Platypus, Hover and Ting.

Tucows, whose EPS nearly doubled last year, may at first glance appear to be on the pricey side, trading at a price/earnings ratio of almost 25. But while Canadian growth has been even weaker than that of the US, this firm's stellar growth makes it worth an above-average valuation, according to the strategy I base on the writings of mutual fund legend Peter Lynch. Lynch famously used the PE-to-growth ratio ( PEG ) to find attractively priced stocks. When we divide Tucows' 24.5 P/E ratio by its stellar 37% long-term earnings-per-share growth rate (I use an average of the three-, four-, and five-year EPS growth rates to determine the long-term rate), we get a PEG ratio of 0.66 - well below the 1.0 upper limit this model uses. In addition, Tucows has a very reasonable 13.3% debt/equity ratio, another reason it impresses the Lynch-based model.

Hooker Furniture Corporation ( HOFT ): Incorporated in 1924 and ranked among the top ten largest publicly traded furniture producers based on shipments to U.S. retailers, Hooker imports residential wood and metal furniture and manufactures and imports upholstered furniture. The Martinsville, Va.-based firm's stores include Bradington-Young and Sam Moore Furniture. Last year, its EPS rose nearly 30%.

Hooker is another favorite of my Lynch-based model, in part because of its stellar 31% long-term EPS growth rate. Shares trade for reasonable 16.5 times earnings, making for a bargain-level 0.53 PEG ratio. In addition, Hooker has no long-term debt, a great sign.

AMC Networks ( AMCX ): Are you a fan of The Walking Dead? Mad Men? Portlandia? Orphan Black? If you are, this may be the stock for you. This $2.8 billion market cap firm has become a major player in the television industry, offering up all of those wildly popular shows and more through its own cable brands (which include AMC, IFC, SundanceTV, WE tv, and IFC Films) and BBC America, which it operates through a joint venture.

The model I base on the writings of fund manager Joel Greenblatt is particularly high on AMC, which increased EPS about 50% last year. Greenblatt's approach is a remarkably simple one that looks at just two variables: earnings yield and return on capital. My Greenblatt-inspired model likes AMC's 10.2% earnings yield and 64.9% ROC, which combine to make the stock the 27th best in the entire U.S. market right now, according to this approach

Home BancShares (HOMB): Home provides a range of commercial and retail banking and related financial services to businesses, real estate developers and investors, individuals and municipalities through its wholly owned community bank subsidiary, Centennial Bank. Centennial has locations in Arkansas, Florida and South Alabama.

Home ($3 billion market cap) has grown EPS at 31% clip over the long term. Last quarter, it increased EPS by 26% and sales by 28%, helping it earn high marks from my Motley Fool-based strategy, which is inspired by an approach detailed by Fool co-creators Tom and David Gardner. The strategy also likes Home's 33.4% after-tax profit margin, 0.64 PE-to-growth ratio, and $2.29 in per-share free cash flow.

I'm long HOFT, HOMB.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

TCX NVR AMCX PEG HOFT

Other Topics

Stocks

Latest Markets Videos