by Dan Burrows | October 10, 2013 6:09 am
When you think of hot growth stocks, the usual suspects of Netflix (NFLX), Amazon.com (AMZN) and Tesla Motors (TSLA) come to mind, but between momentum and sky-high valuations, there’s no telling when any of these names could come crashing down to earth.
Fortunately, in more boring parts of the market, there are high-quality stocks with red-hot long-term growth prospects trading at bargain-basement prices.
And they are about as far away from tech or other traditional growth areas as they come.
The first thing we wanted in our surprising and cheap hot growth stocks was quality, so we limited our search to names with a return on equity (ROE) of at least 20. Then, to make sure the growth was there, we looked for stocks that are rapidly increasing their profits. In this case, the long-term growth forecast had to be at least 20%, or more than twice that of the S&P 500.
Finally, we wanted value. Hot growth stocks usually come with a hefty premium, but we wanted cheap stocks in old, stable businesses that just happened to have great growth prospects. To suss out would-be bargains, we searched for stocks that are cheaper than the broader market, and trading at discounts to their own historical averages on a forward price-to-earnings basis.
Here are some of the most promising stocks we found:
Forward P/E: 8
Long-Term Growth Rate: 32%
A tire company founded in 1898 might be the last thing you’d think of when looking for high-growth stocks, but Goodyear Tire & Rubber (GT) is burning up the track.
Net income for the most recent quarter jumped 37% year-over-year, driven by strong sales in Latin America, Asia, and yes, even poky old Europe. Much of the future growth is projected to come from Latin America and Asia, where a burgeoning middle class and expanding consumer credit are fueling car sales.
In other good news for investors, GT announced in September that it was reinstating a dividend (it hasn’t paid one since 2002) and is buying back $100 million of its own stock.
Goodyear stock is up 56% for the year-to-date — beating the S&P 500 by 43 percentage points — but still looks like a bargain. GT currently offers a 40% discount to its own five-year average on a forward earnings basis, according to data from Thomson Reuters Stock Reports.
Forward P/E: 10
Long-Term Growth Rate: 31%
The car-rental agency that tries harder has served up market-crushing results for the year-to-date, and there looks to be more upside down the road.
Avis Budget (CAR) has taken its lumps this year. Weakness in Europe and Australia — as well as higher fleet costs — caused it to cough up some ugly second-quarter results. A tepid forecast and a profit warning from rival Hertz (HTZ) were no fun either, but at least they’ve helped keep the valuation compelling.
CAR goes for 10 times forward earnings — well below the five-year average of 12.5, according to data from Thomson Reuters Stock Reports — despite having a long-term growth forecast of 31%. Multiple expansion alone should fuel the stock, which has hardly stalled in 2013 even amid disappointing news. Shares are up 43%, outpacing the S&P 500 by 27 percentage points.
A word of warning, though: Investors in CAR are in for a bumpy ride. With a beta of 2.6, the stock is about two-and-a-half times more volatile than the broader market.
Forward P/E: 11
Long-Term Growth Rate: 42%
Manitowoc (MTW) makes cranes and foodservice equipment, but it’s the former product that provides all the growth opportunities.
A pickup in non-residential construction in the U.S. should only add to demand for cranes that’s currently being boosted by the energy boom. Farther afield, a rebound in China and other emerging markets will lift sales of construction cranes — especially the type used in rugged terrain.
One thing that probably scares some investors off Manitowoc — and helps tamp down the valuation — is remarkable volatility. With a beta 0f 4.3, MTW is more than four times more volatile than the broader market.
But that hasn’t kept shares from being a market-beater for the year-to-date by about a percentage point. And during the past 52 weeks, MTW is leading the S&P 500 by 15 percentage points.
Despite the torrid growth forecast, shares are on sale, offering a 33% discount to their own five-year average, according to data from Thomson Reuters Stock Reports.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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