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Issues defined as “growth stocks” have a number of common traits, but the most important is that their earnings are expected to grow at a faster pace than the broader market over a period of time. With that in mind, Value Line runs a screen in its Summary & Index that searches for stocks that meet this key criterion. It focuses on issues that have recorded good per-share earnings gains in recent years and that ought to continue to do so in the future.

To make our list, a company's annual growth of sales, cash flow, earnings, dividends and book value must together have averaged 10% or more over the past 10 years and be expected to average at least 10% in the coming 3-5 years, which is no easy feat considering that this time span included varying rates of economic growth. To narrow the list down further, we only included companies that primarily offer goods and services to consumers not organizations or institutions.  Below we highlight two of the stocks from our screen with sound investment merit: Gildan Activewear (GIL) and Tractor Supply Company (TSCO).

Gildan Activewear

Gildan Activewear is a vertically integrated manufacturer of basic, frequently replaced, nonfashion apparel. Activewear/underwear (t-shirts, sports shirts, underwear, fleece sweat shirts/pants) account for 80% of the top line, while socks comprise 20%. The company has yarn-spinning, textile making, sewing, and distribution operations. Gildan primarily sells “blanks” (plain tees and sweatshirts) to distributors serving silk-screen printers. Printed tees and sweatshirts are marketed at sporting events and stadium concerts.

Extreme cotton-price volatility hurt fiscal 2012’s bottom line, while relative price stability, contributions from acquisitions, and operating margin improvement of almost seven percentage points were the catalysts behind record earnings in fiscal 2013. Expanded production capacity at Gildan’s factories in Bangladesh helped support an increase of over 30%, year to year, of its international (Europe and Asia) printwear sales in the December quarter.

The ramp-up of sales of the company’s branded apparel lines also augurs well for solid results during the balance of fiscal 2014. Although the company remains predominantly a generic garment manufacturer, Gildan branded shipments of socks and underwear to Wal-Mart (WMT - Free Wal-Mart Stock Report) began last year, and similar programs with other large retailers are now under way. New licensing agreements with the Under Armour, New Balance, and Mossy Oak labels are other considerations for Branded Apparel’s bright sales growth prospects.

Even at the recent elevated price, this timely stock offers good 3- to 5-year earnings growth potential to 2017–2019.

Tractor Supply Company

Tractor Supply Company is the predominant operator of retail farm and ranch stores in the United States. It operates under the Tractor Supply Company and Del’s Farm Supply banners and is three times larger than its five nearest competitors combined. Approximately one quarter of sales are derived from high-margined private label merchandise. Its customer base consists mostly of homeowners with above-average incomes and little debt, including recreational farmers and ranchers, as well as those who enjoy the rural, “out here” lifestyle. Product offerings include horse, pet, and small animal products necessary for their health, care, growth, and containment; hardware, truck, towing, and tool products; seasonal items including lawn and garden goods and power equipment, maintenance products and work/recreational clothing and footwear.

Tractor Supply management is calling for solid 9.5%-13% earnings growth this year, but that range is significantly below the 20%-plus gains recorded in the 2009-2013 period. One reason for the ‘‘slowdown’’ is expected deflation of zero to down 1% (which could limit comp-store sales gains to 2.5%-4%) due to lower input costs. Other factors limiting bottom-line growth are a move to a new corporate store-support center and higher medical costs tied to greater employee enrollment and the Affordable Care Act. Additionally, Tractor is incurring higher freight costs as it operates more stores in the widely spaced western states. We expect the company’s above-average earnings growth to resume in 2015.

Nonetheless, management has outlined aggressive growth plans through 2017. It’s targeting annual earnings increases of 14%-16%, bolstered by 3%-5% in comparable-store growth and yearly operating margin expansion of 25 basis points. Other pluses include square footage growth and share repurchases.

These neutrally ranked top-quality shares ought to interest long term investors. A mid-teens earnings growth rate along with a pristine balance sheet exceed the promise of many equities.

 

Company Name Ticker Industry Name
Gildan Activewear GIL Apparel
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Open Text Corp. OTEX E-Commerce
TIBCO Software TIBX E-Commerce
Stratasys Ltd. SSYS Electronics
Jarden Corp. JAH Household Products
eBay Inc. EBAY Internet
Polaris Inds. PII Recreation
Smith & Wesson Hldg. SWHC Recreation
Cabela's Inc. CAB Retail (Hardlines)
Fossil Group FOSL Retail (Hardlines)
GameStop Corp. GME Retail (Hardlines)
Hibbett Sports HIBB Retail (Hardlines)
TJX Companies TJX Retail (Softlines)
Urban Outfitters URBN Retail (Softlines)
Advance Auto Parts AAP Retail Automotive
Copart, Inc. CPRT Retail Automotive
Fastenal Co. FAST Retail Building Supply
Lowe's Cos. LOW Retail Building Supply
Tractor Supply TSCO Retail Building Supply
Aaron's Inc. AAN Retail Store
Dollar Tree, Inc. DLTR Retail Store
Keurig Green Mountain GMCR Retail/Wholesale Food
Whole Foods Market WFM Retail/Wholesale Food
Nu Skin Enterprises NUS Toiletries/Cosmetics

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