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In this screen, we look at stocks with some degree of risk as well as ample projected 3- to 5-year price appreciation potential. Although most investors would prefer to have low risk and high potential returns, the number of equities that can realistically meet both these criteria are rather limited. Therefore, we have chosen not to include a low-risk requirement in order to attain a broader field of equities to choose from.

We started off by screening for issues with Safety ranks of 4 and above, as well as Price Stability Scores that were in the 50th percentile or greater. The minimum Financial Strength Rating for this screen was a B. In order to incorporate a value element, we excluded stocks that have beaten the return of the S&P 500 index thus far in 2013, which is now at approximately 24%. Finally, the stocks were required to have a projected 3- to 5-year price change percentage of at least 80%. The resulting list of 31 stocks can be seen below. Out of the list, we have chosen to highlight Vitamin Shoppe (VSI) and Red Hat (RHT).

Vitamin Shoppe

Vitamin Shoppe specializes in the retailing and direct marketing of vitamins, minerals, herbs, supplements, sports nutrition, plus other health and wellness products. In addition to offering some 600 national branded products, the company also exclusively carries products under The Vitamin Shoppe, BodyTech, True Athlete, and MyTrition brands. The New Jersey-based firm conducts business through more than 630 company-operated stores under The Vitamin Shoppe, Super Supplements, and Vitapath retail banners, as well as through its Web site.

The company has performed quite well over the past several years, thanks partially to greater health awareness among consumers and an aging population in the United States. However, with comp trends beginning to show signs of deceleration, and increased competition entering the market, we have taken a more cautious stance on Vitamin Shoppe for the time being. As a result, we trimmed our 2013 share-net estimate by $0.15, to $2.25. Still, that would be about 11% higher than the prior-year tally of $2.02.

To management’s credit, it has done an effective job of expanding the company’s national footprint, with a presence in more than 40 states. In our view, this strategy places Vitamin Shoppe in a more favorable long-term position than new market entrants. Furthermore, with its limited exposure on the global stage, we see ample opportunities to grow the store base in the coming years. Lastly, the company should continue to benefit nicely from new products. Case in point: The recently launched MyTrition products are performing so well there have been problems keeping them on the shelves. 


Red Hat

Red Hat is a global provider of open source software solutions, using a community-powered approach to develop and offer operating system, middleware, virtualization, storage, and cloud technologies. It also provides training, consulting, and support services. The company primarily offers enterprise technologies in the form of annual or multi-year subscriptions, and recognizes revenue over the period of these subscription agreements. Foreign operations presently account for over 40% of total sales.

The company’s margins will probably be down a bit in fiscal 2013, which ends on February 28th of 2014. In fact, it plans to add roughly 150 employees per quarter, primarily in the areas of engineering, sales, and support. With more engineers, Red Hat hopes to make gains in the storage, cloud, and middleware segments. Furthermore, international expansion ought to continue. (The company currently has around 80 offices in more than 30 countries.) As a result of these investments, for the first six months of fiscal 2013, the net profit margin was 11.0%, a 0.4% decline from last year’s figure. We see more of the same during the second half.  

Over the past fiscal year, there has been some activity on the acquisition front. One deal was ManageIQ, a provider of enterprise cloud management and automation solutions. What’s more, the company purchased two businesses operating in the middleware space from Polymita Technologies and Progress Software Corporation. Supported by decent finances, we anticipate more purchases, as Red Hat seeks to strengthen and broaden its product lines.  

 

Company

Ticker

Apple Inc.

AAPL

Cognizant Technology

CTSH

Edwards Lifesciences

EW

EMC Corp.

EMC

IAC/InterActiveCorp

IACI

Teradata Corp.

TDC

Amer. Eagle Outfitters

AEO

Broadcom Corp. 'A'

BRCM

Can. Natural Res.

CNQ.TO

Cash Amer. Int'l

CSH

Citrix Sys.

CTXS

Crown Holdings

CCK

Cutera, Inc.

CUTR

CVR Partners, LP

UAN

Diamond Offshore

DO

Dick's Sporting Goods

DKS

EarthLink, Inc.

ELNK

Encana Corp.

ECA

Equinix, Inc.

EQIX

Hologic, Inc.

HOLX

Linn Energy, LLC

LINE

ManTech Int'l 'A'

MANT

Nissan Motor ADR

NSANY

Olin Corp.

OLN

QLogic Corp.

QLGC

Red Hat, Inc.

RHT

Resources Connection

RECN

Tetra Tech

TTEK

Thoratec Corp.

THOR

Urban Outfitters

URBN

Vitamin Shoppe

VSI

At the time of this article's writing, the author did not have positions in any of the companies mentioned.