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 Selection & Opinion 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 should continue to do so in the future, such as Research in Motion (RIMM), Celgene Corp. (CELG), and Coach (COH).
To make our list, all stocks had to be ranked 3 (Average), or better, for both Safety and Timeliness (i.e., relative price performance in the year ahead), two of Value Line’s many proprietary rankings. Additionally, all of these companies have managed to increase earnings at a 15%, or better, compounded annual rate over the past five years, which is no easy feat considering that this time span included varying rates of economic growth. We also required at least 20% earnings growth in the current fiscal year and a minimum of 10% projected three- to five-year profit growth. We further limited our list to stocks that had moved up in price by at least 15% in the past 13 weeks, thus ensuring strong relative price momentum.
The resulting list is an interesting mix of names (some surprising, others not), that not only performed well even as economic growth slowed, but are projected by our analysts to have worthwhile earnings growth prospects in the year ahead. Below we highlight some of the stocks from our screen:
Research In Motion
Research In Motion develops and manufactures wireless hand-held devices (including smartphones) and radio modems, and provides related services, for mobile computing and data communications. The company recently introduced the Torch, its first smartphone that runs on the new BlackBerry 6 operating system, and is expected to announce more new models with easier Web surfing capabilities in the future.
In spite of the tough competition in the smartphone market, Research In Motion continues to experience solid growth. Revenues advanced 31%, year to year, in the August quarter, and earnings per share jumped 42%. Meanwhile, operating metrics indicate a continuation of favorable fundamentals. Indeed, RIM shipped 12.1 million BlackBerry smartphones during the August quarter, up 45% on a year-to-year basis. It also added 4.5 million subscribers during the same period, increasing the total subscriber base to over 50 million. In addition, the company estimates that it will add some 5.2 million more subscribers in the November interim. Assuming RIM can develop new products with attractive social media functionality, the 3- to 5-year outlook for earnings growth is positive.
Celgene Corp. is engaged in the development and commercialization of orally administered drugs for cancer and inflammatory diseases. In 2009, Thalomid accounted for 16% of overall sales, Revlimid made up 63%, Vidaza was 14%, Alkeran brought in 1%, and royalties/other accounted for the remaining 6%. The company’s research and development pipeline includes immune modulators, selective cytokine inhibitory drugs, estrogen receptor modulators, and kinase inhibitors. International markets accounted for 36% of sales last year.
Fundamentals at the biotech pharmaceutical firm are being driven by strong demand for its cancer drugs. In the third quarter, revenues rose 31% and net income increased 30%. Sales of the company’s most important drug, Revlimid, jumped 43%. Based on the continued success of the company’s core cancer drugs, the 3- to 5-year picture for profit growth is favorable. Additionally, the recent acquisition of Abraxis Bioscience gives Celgene access to the solid tumor market.
Coach, Inc. is a designer, producer, and marketer of high-quality modern American classic accessories. Its primary product offerings include handbags, women’s and men’s accessories, business cases, luggage, leather outerwear, gloves, scarves, and personal planning products. The company also licenses watches, footwear, and home and office furniture. Coach operates 441 North American stores (including 111 factory outlets).
Despite still-sluggish global consumer spending patterns, the company posted strong results for its September quarter. Earnings per share surged 43%, year to year, aided by a 20% gain in sales. North American same-store sales improved 8.5%, the largest advance in more than two years. Coach’s globalization efforts are paying off too, with the Chinese market adding tremendous growth potential. Assuming the company can continue its favorable merchandising/marketing, it should be able to generate attractive profit growth over the 3- to 5-year time frame.
To see the 16 stocks our screen returned, limited to those that carry Above-Average scores Timeliness, subscribers can click here. As always, subscribers should carefully review the analyses in Ratings & Reports before committing funds to any particular equity.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.