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Stock Screen: Growth Stocks with Moderate Risk - September 28, 2011
This screen is designed for investors seeking stocks with worthwhile long-term appreciation potential and low-to-moderate risk. Given those requirements, it is not surprising that entertainment stalwart Disney (DIS - Free Disney Stock Report) made the cut. One of the world’s premier asset managers, BlackRock (BLK), and leading pharmacy chain Walgreen Co. (WAG) also met the stringent criteria.
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 90%, 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 15 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.
BlackRock is one of the world’s largest publicly traded investment management companies. It implements equity, fixed income, cash management, alternative investment, real estate and advisory strategies on behalf of institutions and individuals worldwide. It also offers investment system, risk management, and financial advisory services. Assets under management totaled $3.66 trillion as of June 30, 2011.
Earnings growth has been extremely impressive for some time now. The bottom line surged 45% in the second quarter, thanks largely to strong asset growth and performance fees facilitated by its arguably best-in-class portfolio managers. Although analyst Garrett Sussman, CFA thinks that a decline in equity markets may well present some headwinds in the months ahead, he believes that the recent price decline is overdone and that patient investors will be well rewarded. Indeed, improved global economies, a wide array of product offerings, and the integration of Barclays Global Investors ought to drive significant multiple expansion out to mid decade. The company’s healthy balance sheet instill further confidence.
The Walt Disney Company is an entertainment conglomerate that runs multiple business segments. The company operates Media Networks (45% of 2010 revenues.), including ABC and ESPN; Parks and Resorts: Disneyland, Walt Disney World (Magic Kingdom, Epcot, Disney’s Hollywood Studios), and a cruise line (28%); Studio Entertainment (18%); Consumer Products (7%); and Interactive Media (2%). It also earns Tokyo Disneyland royalties and manages Disneyland Resort Paris and Hong Kong Disneyland.
The company got back on track in the third quarter (fiscal year ends September 30th), posting better-than-expected earnings growth of 16%. Each of Disney’s businesses appear to be doing well, and analyst Damon Churchwell looks for similar success going forward based on the upcoming expansion in the Parks and Resorts franchise, the roll out of new series in Media, and continued box office success. Although Cars 2 produced $550 million in theaters this past summer, the result disappointed some investors since they were anticipating numbers closer to 2010’s smash hit Toy Story 3, which is the highest grossing animated film of all time and the 7th overall. The company’s 1994 hit The Lion King was re-released in 3D for two weeks starting on September 16, 2011. In the 12 days it has been in theaters, it has grossed around $80 million dollars, which we think demonstrates the viability of future 3D re-releases.
Walgreen Company is the nation’s second largest drug retail chain and distributor. The company operated 8,046 drugstores in all 50 states, the District of Columbia, Puerto Rico, and, Guam as of August 31, 2010. It also runs 137 worksite facilities, operates worksite health and wellness centers, home care facilities, and specialty and mail services businesses. In 2010, pharmacy contributed 65% of sales, with third-party sales comprising 95.3% of the pharmacy business. Other general merchandise accounted for 35% of the top line. Stores averaged nearly $9 million in annual sales in fiscal 2011 (ended August 31st).
The company closed out the year in an impressive fashion, increasing earnings per share by 17% year over year. We look for more of the same going forward, thanks to the company’s renewed focus on its core operations. The sale of its pharmacy benefit manager (PBM) business, along with ongoing cost-containment measures, ought to give margins legs to run, while the cash generated from the sale has enabled management to fortify its web presence.
Management recently announced that no progress was made in a rate dispute with primary customer and PBM Express Scripts (ESRX). It is still uncertain how many Express Scripts customers will stop using Walgreens as their primary pharmacy. This is casting a shadow over the shares since it could result in a substantial hit to earnings in fiscal 2012.
On the bright side, Walgreen’s war chest remains filled with cash, and share repurchases, coupled with an effective store expansion strategy of placing locations near large populations of baby boomers, should allow for healthy share-net gains out to 2014-2016.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.