Jubak's Journal Recent articles: • 5 reasons drug stocks aren't worth what they were, 6/8/2004 • Manufacturing is back: 3 winners, 6/4/2004 • 5 stocks that'll overcome oil prices, 6/2/2004 More... | Jubak's Journal Jubak: 5 reasonably priced growth stocks Investors need to take care when picking stocks in a market pulled one way by solid growth and another by fears of rising rates and raw material costs. Here's the best approach. By Jim Jubak The economy is chugging along. The gross domestic product grew at a rate of 4.4% in the first quarter, following 4.1% growth in the fourth quarter and 8.1% growth in the third quarter. Investors certainly dont want to be sitting on a siding while this train is rolling down the track. But high energy costs, higher interest rates, rising raw materials prices, the mountain of government and private debt could all slow the train or maybe even derail it. Investors certainly dont want to be running after potential profits so hot and fast that they risk blowing up the boiler.
Sounds like the perfect time for GARP, or growth at a reasonable price. It involves picking stocks of companies that are likely to be growing in the future instead of concentrating on picks that have their best growth behind them. A map to find these stocks To show you what I mean Ive built a screen for growth at a reasonable price stocks. Since Ive been using this approach a lot in the current market, youll find a number of my recent CNBC picks on the list such as Cooper Tire & Rubber Youll also find the three new stocks that I recommended on CNBCs "Morning Call" on June 9 during my regular 11:20 a.m. ET appearance, plus two exclusive picks for MSN Money readers. The stock are Deere Be careful. Youll also find a lot of stocks that look like GARP picks but are really coasting on past performance. The biggest group of these, such as Ford Now on to those stocks with true GARP potential. Riding the ag boom Deere sure has had a good run in the last year. Its shares are up 55% since last June. But the global boom in agriculture that has powered the stock isnt over and the pullback that started on April 22 has created a decent entry point. When it announced its April quarter earnings, the company raised its estimate for the fiscal year that ends in October to $4.75 a share. For fiscal 2005, the company could make as much as $6 a share, Wall Street analysts estimate. Certainly the company hasnt yet matched past peaks. For example, fiscal 2003 sales of row crop tractors were a full 70% below the 1998 sales peak. Margins look like theyre likely to expand. The company projects that it will be able to offset all the additional $125 million in higher prices for raw materials this year through cost-cutting but sales have been so strong that Deere has increased its prices by about 3%. The shares trade at 15 times projected fiscal 2004 earnings per share. Wall Street projects earnings growth of 76% this fiscal year and 14% in fiscal 2005. Electric potential Its the fluid and electrical segments of Eatons business, about 60% of total revenue, that give this industrial late-cycle earnings power. The fluid segment sells hydraulic systems to industrial equipment makers, aerospace companies and automakers. Acquisitions to fill out the product line and expansion in China give this segment of Eaton roughly a 10% growth rate at this point in the economic cycle. The company is likely to get about the same 10% revenue growth from its electrical segment, which sells switches, circuit breakers and power controls to the utility, residential, commercial and industrial markets. Wall Street projects 45% earnings per share growth in 2004 and 21% growth in 2005. The shares trade at 15 times projected 2004 earnings per share. With prices for the electrical and computer components that Arrow Electronics distributes for more than 600 suppliers stable and worries about scarce component supplies in abeyance for the moment, no one seems to be stockpiling inventory. Thats good news since it means that the recent May slump in orders is likely to turn into heavier buying as electronics and computer manufacturers ramp up for the year's second half. Wall Street projects earnings per share will grow by 161% in 204 and 18% in 2005. Arrow shares trade at 14 times projected 2004 earnings per share. Two exclusive picks for CNBC.com on MSN You can think of Applied Industrial Technologies as a much smaller version of Eaton since it too operates in the market for fluid and electrical systems and components. (Unlike Eaton, Applied Industrial Technologies doesnt manufacture most of what it sells, and the company is stronger in the maintenance and repair markets than in the original equipment manufacturer markets where Eaton sells.) The smaller size gives the stock more leverage to earnings growth -- and more volatility to the downside when something goes wrong. Now, though, Wall Street doesnt see anything going wrong. Earnings per share are projected to grow by 55% in the fiscal year that ends this month and by 22% in the fiscal year that ends in June 2005. Shares trade at 16 times projected fiscal 2005 earnings per share. Stein Mart is a turnaround story. This off-price apparel retailer has closed underperforming stores, started a new clearance policy that puts markdowns on a slower but more predictable level and revamped its TV marketing. The results were impressive in the fiscal first quarter as sale-store sales climbed almost 12% from the same period in 2003 and operating margins climbed to better than 4%. Thats still lower than the 5% to 6% margins the company saw in the 1990s. With quarter to quarter sales comparisons extremely easy for the next two quarters -- both quarters showed a decline in same store sales of almost 6% in 2003 -- Stein Marts turnaround story still has lots of room to run. Wall Street analysts project earnings per share growth of 730% for the fiscal year that ends in January 2005 and 37% for the fiscal year that ends in January 2006. Stein Mart shares trade at 20 times projected fiscal 2005 earnings per share. 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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