This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. Given that growth is the main criteria, it is not surprising that the list contains a number of technology companies, like Texas Instruments (TXN) and Hewlett-Packard (HPQ – Free Hewlett-Packard Stock Report). Several healthcare companies also made the cut, as well as one entertainment enterprise, Walt Disney (DIS – Free Walt Disney Stock Report).
We began by screening for companies where share earnings have compounded at a minimum 15% annual rate over the past five years and that are expected to at least maintain a 10% annual growth rate over the next 3 to 5 years.
Next, we limited the list to stocks with price appreciation potential of 65%, or more, over the next 3 to 5 years, measured from the mid-point of each issue’s Target Price Range. To control for risk, we required that all stocks selected have Safety ranks that are 3 (Average), or better (i.e. 1 or 2). Going one step further, we also required that each company have a Financial Strength rating of B+ (Average) or better. Additionally, minimum standards were set for Price Stability scores. These factors should help select those companies with lower-than-average risk profiles. Finally, to guard against near-term underperformance, we required that all stocks be ranked 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead). Investors should note that Safety, Financial Strength, Price Stability, and Timeliness are all proprietary ranks developed by Value Line.
Given these relatively stringent criteria, it isn’t surprising that there were only 12 issues in our universe that made the final cut. In fact, selecting growth stocks with the combination of worthwhile appreciation potential and low-to-moderate risk remains a difficult task, especially at a time when the prospects for economic growth have become more modest. Thus, the stocks listed below comprise an elite group. Many growth stocks, including some with better historical and prospective appreciation potential, were eliminated due to their less-than-stellar marks for Financial Strength or their volatile share price movements. We note, however, that the equities included below are likely to provide investors with worthwhile returns over the next 3 to 5 years, reflecting each issue’s prospects for price appreciation during that time frame.
Those wanting to hold less-risky stocks with good prospects may consider some of the choices listed below. As always, we strongly urge investors to consult the individual analyses in Ratings & Reports before committing to any of the issues that appear in this screen. All data are from The Value Line Investment Survey that went to press on January 14, 2011. Investors should note that this is only a partial list. To see all of the issues that our screen returned, complete with Timeliness, Safety, Price Stability, and Financial Strength ratings, subscribers can click here.
Texas Instruments is a global manufacturer of semiconductors and electronic products. The company is the leading supplier of digital signal processors and analog devices. It markets electrical controls, educational and productivity solutions, and metallurgical materials. Moreover, royalty income from licensing propriety technology is substantial.
Texas Instruments is benefiting from a solid cyclical upturn in the semiconductor industry, along with an improving global economy. Healthier demand in electronics end markets is the main driver of semiconductor shipments. Share net in the third quarter of 2010 increased sharply, thanks to solid revenue and gross margin gains. We expect that the positive momentum continued in the fourth quarter. (The company is scheduled to announce fourth-quarter results on January 24, 2011.) Texas Instruments should also experience healthy top- and bottom-line gains in the year just started, assuming favorable economic conditions. Analog chips ought to be helped by strength in both high-performance and high-volume products, while embedded processing should be aided by increases in digital signal processor and microcontroller catalog products. Too, the wireless business is expected to thrive, reflecting increased demand for connectivity products. Longer-term prospects should be aided by the company’s strong market position in several sectors, including analog and embedded processors, along with increased levels of manufacturing capacity.
Walt Disney operates media networks, including ESPN and ABC; parks and resorts, such as Disneyland, Walt Disney World (Magic Kingdom), Epcot, and Disney’s Hollywood studios; studio entertainment; consumer products; and interactive media. The company earns royalties on Tokyo Disneyland and also manages Disneyland Resort Paris and Hong Kong Disneyland.
Although Disney’s September-quarter performance was a slight disappointment, fiscal 2010 (ended October 2, 2010) was a good year, nevertheless, with revenues reaching an all-time high of over $38 billion, while share net of $2.07 marked a decent recovery following the previous fiscal year’s lackluster results. Looking to fiscal 2011 and beyond, we are optimistic regarding the company’s top- and bottom-line prospects, thanks, at least in part, to a stronger economic backdrop. The studio continues to take steps to enhance profitability. Disney has agreed to purchase from Viacom’s (VIA) Paramount the marketing and distribution rights to several upcoming Marvel (Disney acquired Marvel Entertainment in December, 2009) releases including Iron Man 3. A stabilization of theme park and hotel earnings would help to ignite results. International businesses have been spurring top-line advances in this segment, but lower attendance and cost hikes, including employee benefits, curbed income in fiscal 2010. An upturn in the leisure travel environment and a reduction in discounting activity might well support a recovery.
Hewlett-Packard provides computing and imaging solutions and services to consumers and businesses. The company operates in six segments: Imaging & Printing (20% of 2010 revenue), Personal Systems, (32%), Enterprise Storage & Servers (15%), Services, (27%), Financing (3%), and Software, (3%). Research and development costs amounted to 2.3% of 2010 revenue.
Hewlett-Packard ended fiscal 2010 (ended October 31, 2010) on a solid note. Sales increased by a high double-digit percentage in the final quarter of the fiscal year. The company experienced continued strength in sales to businesses, while consumer demand was mixed. All regions contributed to the solid revenue performance, with healthy growth in most of Asia partly offset by soft sales of low-end consumer notebooks in China, reflecting quality issues that are being addressed. The solid momentum should continue in the current fiscal year. This is despite expectations of more modest growth in the industry standard servers than in the past several quarters and the ongoing negative effects of economic pressures on consumer demand. Increased operating costs should be offset by further widening of the gross margin, reflecting productivity improvements and recent acquisitions of businesses with lucrative margins.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.