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Stock Screen: Stocks with High Price and Earnings Momentum - December 14, 2011
In this screen, we focus on share price and earnings momentum, two of the many criteria used by Value Line’s proprietary Timeliness Ranking System to identify stocks likely to outperform, mirror, or lag the market over the next six to 12 months. Some of the names that passed the screen this time around include Red Hat, Inc. (RHT) and Manhattan Associates, Inc. (MANH).
To make the cut, an issue had to appreciate by at least 15% in terms of price over the last 13 weeks. We note that, by way of comparison, The Value Line (Arithmetic) Average, a broad measure of the stock market, increased 0.9% during the same period. In addition, these companies posted year-over-year gains in earnings per share of at least 50% during the most recent three-month period for which they have reported financial results. And, according to Value Line's analysts, their year-over-year share net is estimated to advance by at least 30% in the next quarter and 20% for the current fiscal year, as a whole. By these measures, then, the equities in this screen can be characterized as investor favorites.
Moreover, all of these stocks are ranked 3 (Average), or better, for relative price performance in the year ahead. And, to provide a cushion in today's volatile market, we eliminated all stocks that were ranked Below Average (4 or 5) for Safety, another one of Value Line’s proprietary measures.
Having constructed a list of stocks with attractive near-term growth prospects, we noticed some interesting trends regarding their valuations, as expressed by their price-earnings (P/E) ratios, and their beta coefficients (a measure of the correlation of a stock's return relative to that of the broader market). In a number of cases, investors are willing to pay a wide premium for these companies' relatively rapid earnings growth. Meanwhile, taken more broadly, the group's median P/E ratio of 17.4 (average = 19.5) is some 12% higher than the current median (15.6) of the entire Value Line universe. In addition, less than 20% of the stocks in this list have beta coefficients below the market (1.00).
Red Hat, Inc.
Red Hat is a leading provider of open source software solutions to the enterprise market. Its products include a core enterprise operating system platform, Red Hat Enterprise Linux, an enterprise middleware solution, JBoss Enterprise Middleware, virtualization and cloud solutions, as well as other enterprise technologies. The company utilizes an open source software development and licensing model, employing the collaborative input of a global community of developers to build and enhance software and keep costs low. Red Hat plays an active, often leading role, in this community-oriented development process, leveraging it to create its Red Hat and JBoss branded technologies.
The company’s prospects are solid, with multiple opportunities for growth. Recent updates to its JBoss Middleware portfolio should make it easier for organizations to take advantage of the flexibility and value the platform provides. Additionally, Red Hat’s recent acquisition of Gluster has opened up a new data storage market that may well grow by 20% a year through mid-decade. Only two months after the purchase, Red Hat has just announced the availability of its Red Hat Storage Software Appliance, providing customers with a largely preconfigured server system for network storage.
We think the industry shift toward cloud computing —where programs and data are stored on the Internet rather than on individual machines— augurs well for Red Hat, recognized as a leader in that arena. Indeed, investors have given the sector their approval, as the International Securities Exchange (ISE) Cloud Computing Index is up 277% over the past three years. We project the company’s top line will improve significantly in 2011. The bottom line, too, looks like it will post fortuitous gains. A fresh pipeline and a fertile environment ought to herald outsized appreciation over the long term. Despite the recent pullback in the share price in recent weeks, value investors would best be served elsewhere in our view, considering this issue’s lofty price-to-earnings ratio.
Manhattan Associates, Inc.
Manhattan Associates develops, markets, deploys, and maintains supply chain software solutions for manufacturers, distributors, retailers, suppliers, transportation providers, and consumers. These help organizations improve cost structure, and ensure that the right products are available to the right customers at the right time. The result is improved customer loyalty, differentiated brands, and a better alignment of costs and revenues with organizational goals.
The company views its platform-based approach as the best way to enhance supply-chain efficiency. This strategy considers the interaction of many elements, both internal and external, and how each impacts the operation of each organization’s supply networks. Customers appear to agree with Manhattan Associates' vision, as it signed agreements with several major retailing brands, including Abercrombie & Fitch (ANF) and Winn-Dixie (WINN) during the third quarter. Too, the company recently announced that PT Multitrend Indo, a fast-growing Indonesian retail franchise, has chosen Manhattan Associates’ SCALE (Supply Chain Architected for Logistics Execution) system to improve its inventory accuracy and the visibility of its stock.
We think new products such as Warehouse Management, Distributed Order Management, and Extended Enterprise Management will keep customers coming back for more, supporting strong top-line growth. Indeed, revenues expanded 20% last year, and we project a solid advance this year as well. The bottom line has been robust, powering ahead by triple digits in the third quarter. The widespread cost-cutting mantra at major corporations looks set to support strong demand for MANH’s products, auguring well for prospects. We think share net this year will demonstrate significant improvement over last year’s tally. Share price momentum looks good, barring any upsets in the global economic picture, and should be further buttressed by stock repurchases totaling 6% of the float as of the first nine months of this year. The shares are currently trading at a significant premium to their peer group, and we believe future price appreciation will largely be brought about by upward estimate revisions as opposed to earnings multiple expansion.
As always, we advise investors to review the latest supplementary and full-page reports in Ratings & Reports when reviewing any equity as a potential portfolio addition.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.