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5 safe growth stocks
The market has had a tough start this year, and the downdraft has taken some solid stocks with it. But that just creates opportunities.
By Jim Jubak
Stocks in two sectors that offer almost guaranteed growth even if the economy hits unexpected rough spots this year have fallen the most in the profit-taking that's dominated this month. That means that safe growth is on sale.
In my picks on CNBC's "Morning Call" Wednesday, I offered three stocks from the defense sector that show exactly the kind of long-term strength and short-term pullbacks that I talked about Jan. 12. All have moved from the top of their trading range to either their 50-day moving average or to the bottom of their price channel (as defined by the Bollinger Bands indicator). None have violated their long-term upwards trend.
And why should they? Some defense stocks rightly sold off on leaks that the Pentagon would seek to move some money from high-tech weapons still in the testing stage, like the next generation F-22 fighter and the troubled missile-defense system, and from expensive platforms like nuclear submarines and aircraft carriers. But even for companies like Lockheed Martin (LMT, news, msgs), Boeing (BA, news, msgs) and General Dynamics (GD, news, msgs) that would bear the brunt of the proposed cuts, the declines seemed overdone. The proposed cuts are almost all years down the road, so far out that the pain probably will never actually be delivered. The cuts also are a tiny 1.1% of overall defense spending and 2.2% of research and development spending.
For the stocks of defense companies that provide the bread and butter of the current military -- bullets, vehicle and body armor, electronics and communications gear -- the proposed budget actually brought good news. Much of the money that would come from the high-tech programs would be redirected toward basic military needs.
That just adds a little more growth to what were already some pretty spectacular growth rates. Just to take one example, Alliant Techsystems (ATK, news, msgs), which among other things supplies bullets to the Army, expanded its production capacity to 1.2 billion small caliber bullets in 2004. Now it's investing in new facilities to bring its capacity up to 1.5 billion to 1.8 billion bullets by 2006, a 25% to 50% growth rate. This growth, of course, isn't dependent on the economy's performance.
My three safe growth stocks from the defense sector are:
Raining bullets
Alliant. Almost 60% of Alliant's revenue comes from stuff that goes boom. With U.S. military operations at a level not seen since the Vietnam War, the boom business is booming. Dumb ammunition, what you and I call bullets and shells, makes up a little more than half of this segment's revenue. The rest comes from smart bombs and the gear that makes them fly.
The other big chunk of revenue comes from the company's aerospace business, which makes rocket engines for customers including Boeing and NASA.
Overall sales for the fiscal year that ends in March are projected to climb about 15%. Earnings may dip a little is fiscal 2005 on increased pension expenses, but growth for fiscal 2006 is projected at 13%. The stock trades at 16.4 times projected fiscal 2005 earnings. In the January pullback, the shares dropped from the top of their price channel to their 50-day moving average. Our StockScouter rated the stock a 6 out of a possible 10 on Jan. 19.
Adding protection
Armor Holdings (AH, news, msgs). The orders for armor just keep flooding in from the Defense Department. On Jan. 5, it was an order for $54 million in armor for heavy trucks. That followed a Dec. 12 order for additional armor on the Army's Humvee fleet. This is on top of the $750 million in armor orders from the military and $250 million from other customers that Standard & Poor's had counted by the end of September.
The only question, now that armor demand has climbed to 25,000 sets a month from 1,600 in 2002, is whether Armor Holdings will be able to get its hands on enough ballistic fiber to meet demand. With suppliers set to bring new facilities on line that doesn't seem likely to be a problem. But this worry and analysts' projections that growth will drop to 16% in 2005 from 160% in 2004 is probably what's keeping the stock relatively cheap. It trades at just 17.7 times projected 2004 earnings per share. Like Alliant, Armor Holdings retreated from the top of its price channel in early January to the 50-day moving average. Our StockScouter rated the stock a 6 on Jan. 19.
Communication is key
L-3 Communications (LLL, news, msgs). It makes the high-tech components for the communications gear required for the modern battlefield. For example, the company's high transmission rate, jam-resistant communications components and systems are in use on battlefields in Iraq and Afghanistan. The Navy's Aegis-class destroyers used L-3 Communications voice and data switching systems.
Organic revenue growth should be about 15% in 2005 and earnings growth is projected to top that at 19%. But the company could do even better than that. L-3 Communications has pursued an aggressive acquisition strategy aimed at building leading positions in significant niche markets in the defense and home land security sectors.
The stock trades at 21 times projected 2004 earnings after a retreat from the top of its price channel through its 50-day moving average to near the bottom of its price range. Our StockScouter rated the stock a 9 on Jan. 19.
My two exclusive picks for CNBC.com on MSN readers come from a different safe growth sector, gambling. Here the price drop so far this year has been almost totally the result of profit-taking after the sector's strong performance in 2004.
A good bet
Boyd Gaming (BYD, news, msgs). Revenue at Boyd Gaming is projected to climb 25% in 2005 from the $1.7 billion projected for 2004 as the company's acquisitions of Coast Casinos and a Harrah's Entertainment (HET, news, msgs) casino in Shreveport, La., start contributing to the company's books. The increase doesn't include any credit for the runaway success of the Borgata Hotel Casino and Spa in Atlantic City, N.J., since as a joint venture those revenues aren't consolidated with Boyd's other revenue. The Borgata could see $500 million in net revenue this year, according to Standard & Poor's, which would equal about 25% of the company's total consolidated revenue for the year.
According to the Wall Street consensus, earnings growth will be 32% in 2005. The shares trade at 30 times projected 2004 earnings. The stock pulled back in early January to its 50-day moving average from the top of its price channel. Our StockScouter rated the stock a 6 on Jan. 19.
Still solid growth
Shuffle Master (SHFL, news, msgs) ran the table in 2004. For the company's fiscal year that ended in October, revenue climbed 45% over fiscal 2003 and earnings per share climbed 34%. For the fiscal year that ends this October, Wall Street analysts expect 28% growth in earnings per share and a further 23% growth in fiscal 2006. Projections call for 28% annual growth over the next five years.
Before you hoot at those numbers, note that they're below the annual growth that the company has actually turned in, 33.6% a year, over the last year. Such is the strength of the position that Shuffle Master has carved out for itself in the table gaming industry with its automatic shufflers, proprietary table games and systems to let casinos track table action and the play of individual gamblers. The stock, which split 3-for-2 Tuesday, trades just slightly below its 50-day moving average at about 42 times projected fiscal 2005 earnings per share. Our StockScouter rated the stock a 7 on Jan. 19.
Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday.
E-mail Jim Jubak at jjmail@microsoft.com.
At the time of publication, Jim Jubak did not own or control shares in any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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