These 5 stocks combine value and growth
Posted: August 01, 2018
Oil and water don’t mix.
But value and growth can.
The two leading schools of stock-market investing are often perceived of as foes. But some of the best stocks have one foot in each camp.
Every year, I try to bring you some stocks that exemplify both value (a price no more than 15 times earnings) and growth (earnings and sales growth of 12 percent or better the past five years).
This is the 13th column I have written on the subject, and results to date have been pleasing.
The average 12-month total return on my selections has been 14.96 percent. That compares to 10.85 percent for the Standard & Poor’s 500 Index. Ten of the 12 columns have been profitable and eight have beaten the S&P 500.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Here are five stocks that show both value and growth characteristics now.
Walgreens Boots Alliance Inc. (WAG) owns the American drugstore chain Walgreens and its British counterpart, Boots. It has more than 13,000 drugstores in eleven countries and has wholesale operations in additional countries.
Drugstores have an advantage over other retailers in that people come in to fill prescriptions and linger to buy general merchandise.
Walgreens has grown its earnings at an average of 18 percent a year for the past five years, and sales at 14 percent. Yet the stock sells for only 13 times earnings.
A debt-free choice is little Argan Inc. (AGX), based in Rockville, Md. The company designs and builds energy plants – mostly fueled by natural gas, but also some that use biodiesel, wind or solar power. I had also mentioned Argan last year.
Argan has grown its earnings by about 22 percent per year the past five years, and sales even faster. But investors are terrified because there are few new deals in the pipeline. Analysts expect sales and earnings to plummet in 2019.
That makes Argan risky, but my hunch is that the company will succeed in rebuilding its pipeline. If so, the stock – at $38, down from $69 less than a year ago – is a bargain.
The manufacture of semiconductor chips requires an environment that is ridiculously clean and sometimes very cold. Creating such environments is often done with equipment made by companies such as Ultra Clean Holdings Inc. (UCTT) of Hayward, Calif..
Wall Street analysts expect Ultra Clean’s revenues to grow in the next two years, but earnings to slip below 2017’s level of $2.34 a share. That’s why the stock sells for only six times earnings, a bargain basement multiple.
I think that Ultra Clean’s services will stay in demand, and I like the company’s balance sheet.
TRI Point Group Inc. (TPH), out of Irvine, Calif,, is a homebuilder. It went public in 2013, the first homebuilding company to do so after the financial crisis of 2007-2009.
Homebuilders have been hit on the chin with bad news lately. New home sales were weak in June, and they are at the same level they were a year ago.
TRI Point, however, seems to be doing better than most, thanks partly to its stronghold in fast-growing communities in California. In the second quarter, it had record revenue.
Beer is a mature market, where the leading competitors must scramble for market share because the overall industry isn’t growing much. Molson Coors Brewing Co. of Denver, Colo., has managed to increase its revenue 49 percent a year on average in the past five years, but investors are skeptical it can continue.
This year the stock has fallen more than 21 percent, partly because the Trump administration’s tariffs on aluminum have raised the cost of cans. That’s a genuine problem, but at 14 times earnings the stock looks pretty good to me.
While the long-run results of my Value Plus Growth columns have been good, last year was bad. My picks lost almost 19 percent while the S&P 500 was up more than 17 percent. I had major losses in American Outdoor Brands Corp. (AOBC) and Argan, and no big gainers.
DR Horton Inc. (DHI) and TPG Specialty Lending Inc. (TSLX) were up, but less than the index.
Only one thing can be said about a showing like that: Better luck next year.
Disclosure: I own Argan for one or more clients. I don’t personally own any of the stocks discussed in today’s column.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Mass., and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.