Consider Rotating into 11 Growth Stocks Left Behind

Alan Brochstein screens for high growth stocks down in 2012

With just a few more days left in the first quarter, 2012 is off to a fantastic start. While stocks are up double-digit on average, not every stock has fared so well. In fact, about 18% of the Russell 3000 index is down so far this year. While looking in the bargain bin isn’t always the best strategy for finding new buy ideas, I think that this is a time when it might make sense. The market could be overbought, and I would expect to see some rotation in the next few weeks as institutional investors rebalance their holdings.

One of the longer-term opportunities is to pick up great companies when they go on sale. While actually determining that a company is great takes a lot of work, one of the short-cuts is to look at past performance. Keep in mind, though, that past performance is no guarantee of future results. Things change.

With this caveat, I designed a screen to narrow the list of hundreds of down stocks in order to identify some potential opportunities. Here are the parameters I used in my Baseline screening tool:

·       Market Cap > $500mm
·       Net Debt to Capital < 5%
·       3-year EPS Growth Rate > 20%
·       3-year Sales Growth Rate > 10%
·       LT  Projected EPS Growth Rate > 10%
·       YTD Return < 0
·       2-Year Return > 0
·       5-Year Return > 0
·       PE/5-year Average < 1
·       50dma < 200dma

First, we eliminated tiny stocks and also companies with debt. Second, we required some pretty strong EPS and sales growth in the past as well as future expected growth. Third, we eliminated companies that haven’t increased in price over the past two years or five years. These last two requirements suggest companies that are operating most likely at all-time highs in terms of their stock price (until the recent decline) and level of profits. Fourth, we required that the valuation be below the 5-year average. Finally, by forcing the 50dma below the 200dma, we identified stocks that have corrected.

Here are 11 companies that met all of these criteria, sorted by YTD return:



Please remember that these are not recommendations. You should always do a thorough investigation of any company before investing in it. The source of the data in the table above is Baseline, a product of Thomson Reuters.

I want to break down the list into three groups:  Stocks I don’t know well, stocks I know fairly well, and, finally, stocks on my watchlist.

The stocks I don’t know well include Ceva (CEVA), Opnet Technologies (OPNT), IPC The Hospitalist (IPCM), Deckers (DECK) and Acme Packet (APKT). CEVA licenses technology for cell phones, OPNT is a software company that helps companies manage applications and networks,  and IPCM employs over 1000 hospitalists, which reduce the workload on doctors in hospitals by coordinating care (a cost-saver apparently for the healthcare system). DECK sells three brands of shoes, Uggs, Teva and Simple, and APKT makes “session border controllers”, which enable video and voice on the Internet.

Balchem (BCPC) is a specialty chemical company focused on food, vitamins, animal health and, of all things, fracking. They provide choline as well as other ingredients used in a variety of applications. The shift from gas to oil by energy producers and some competition from Chinese producers hurt their sales of choline into the fracking market. The stock had run up in prior quarters following strong growth in this area. There were some other issues too, but they appear to be short-term in nature. From my perspective, this is an extremely high quality company, and the miss has resulted in potentially a great buy opportunity.

Gentex (GNTX) is another very high quality name in my view. The stock was hit following a delay in expected regulation that would require cars to have rear-view cameras. The company is best known for its auto-dimming mirrors, used in cars, but I am excited by a new application:  Airplanes. The new Boeing 787 Dreamliner uses Gentex technology to dim the windows automatically. This one looks quite interesting to me.

AeroVironment (AVAV) has two exciting businesses:  Unmanned aircraft (drones) and electric vehicle charging systems. Despite constraints on the budget, the Department of Defense seems committed to investing in the drones. There seems to be a lot of technology at this company, and the balance sheet is very strong with about $7 per share in cash

I wrote about Carbo Ceramics (CRR) a couple of weeks ago. As I explained then, the market appears to penalizing the company after they missed expectations due to a rapid decline in their deliveries of their high-end proppants to the Haynesville due to the plunge in prices. The drilling activity is shifting to oil shale, and this will fuel strong demand in the future. I added this stock after their decline to my Top 20 Model Portfolio, and I currently expect that the stock could trade to 158 over the next year.

iRobot (IRBT) is another stock I follow closely. You may know them as the maker of the popular Roomba, but their robots are used in defense applications as well. The stock declined when the company took a more cautious view of defense in the near-term due to budgetary constraints. In the long-run, I expect that defense will be a big customer. In the consumer space, the Roomba is rolling out to Latin America and China. Also, the company has a third division that they just announced, with the initial focus on hospitals with their interactive robot, Ava. I really like this company. I believe that the stock could trade to 37.50 over the next year and am considering adding it to my Top 20 Model Portfolio.

The final stock on my watchlist is NIC (EGOV). The company designs and operates portals for primarily states, enabling things like online driver’s license renewal, collecting a user fee. Earnings for 2012 will be less than analysts were forecasting due to some investments, but, to me, the long-term here looks solid. The stock is still a bit expensive in my view, but probably worth it due the recurring revenue and high barriers to entry. I think it could trade to 16 over the next year.


Just because a stock price declines doesn’t make it an opportunity. With the recent run-up in the market, though, I expect that professional investors will be looking for opportunities to rebalance their portfolio in the coming weeks, taking profits on some big winners and trying to identify situations where the market may have overreacted when companies reported weaker-than-expected earnings or reduced their near-term outlook. The screen that I ran is designed to highlight some declining stocks with favorable growth characteristics that may be allowing a good entry. Remember, though, that screening is just a tool that gets you to a starting point. You need to follow it up with careful research.

Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator

Disclosure:  CRR is in the Top 20 Model Portfolio at Invest By Model

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