by Hilary Kramer | July 5, 2012 11:30 am
I want to take some time to highlight some stocks we already own that I view as strong buys for the second half of the year.
These companies are well-positioned for good earnings growth in the next couple of quarters, and they also have stock prices that have already corrected or have defensive characteristics that make them especially attractive. If you’re just joining us or are looking to put money to work, I would give these strong consideration.
Myriad Genetics (NASDAQ:MYGN) has stabilized in the $22 to $23 range over the last few weeks, and I look for the stock to resume its strong performance in the second half of 2012. As you’ll recall, Myriad develops genetic tests to determine risk of disease. Its innovative screening technologies include BRACAnalysis and Colaris. BRACAnalysis assesses a woman’s risk of developing breast and ovarian cancers, and it is by far the most important of the company’s nine tests currently on the market, bringing in 88% of revenues. Colaris, the company’s test for colon cancer risk, is another major product that is already revving up Myriad’s bottom line. Sales of Colaris increased 51% through the first nine months of fiscal 2012, helping the company to realize 23% revenue growth overall.
I also like MYGN’s strong balance sheet, with $5.55 a share in cash. The company has used its cash balance to buy back shares, which boosts earnings per share, and I expect them to continue to repurchase shares on any weakness. Management has guided for earnings of $1.29 to $1.31 a share in the current fiscal year, and I believe earnings can grow nicely to upwards of $1.50 next year. Strong growth, good visibility and a reasonable valuation should all help drive the stock higher in the second half of 2012.
PriceSmart (NASDAQ:PSMT) got hit pretty hard in the recent market correction, retreating from $83 to $65. What’s important, though, is that PSMT’s growth story remains intact. In the coming months, we can look for comparable store sales at this operator of warehouse clubs in Latin America and the Caribbean to grow by double digits. Earnings per share should increase more than 12% in the current fiscal year, ending in August, to $2.33 a share.
In the following fiscal year, earnings should grow even more, rising about 16.5% to $2.70. A big reason for that will be the elimination of some redundant expenses related to the company’s expansion into Colombia, in addition to the company’s expanding customer base, which the company continues to grow by reinvesting higher sales into lower prices. Colombia is the company’s largest market to date, and I think it is a terrific long-term growth opportunity.
Cognizant Technology (NASDAQ:CTSH) is a leader in information technology (IT) outsourcing. This is a company that has already lowered growth expectations for 2012, causing the stock to fall from the mid $70s down to the $60 range. But let’s look at the numbers again. Management now expects revenues to grow 20%, which is down from 23% but still solid. Most importantly, the long-term trend for increased outsourcing remains strong, and CTSH will be one of the big beneficiaries.
The company says it continues to take market share from competitors, and its higher margin consulting business is growing faster than the company as a whole. The company has also launched new services to drive growth, and earnings are expected to grow around 18% in each of the next two years. A lot of companies would kill for that kind of growth.
The company does have some exposure to European banks, which you should be aware of, so developments out of Europe will impact the stock. In the big picture, I’m confident that the cost savings and expertise the company provides to customers will offset any cyclical weakness. Trading at 17.2X estimated 2012 earnings of $3.38 a share, investors are discounting much slower growth than the company will likely achieve during the next few years, which makes it a strong buy.
Casey’s General Stores (NASDAQ:CASY) has been climbing higher and recovered a significant chunk of lost ground after pulling back earlier this month on lower-than-expected earnings. Even with the pullback, CASY is up 6% since we added it in March in a time when the S&P 500 is down about 5%.
As we said at the time, the important thing to know about CASY’s earnings shortfall was that it was due to transitory issues, specifically lower-than-expected margins in gasoline sales and costs related to driving future growth. Remember that Casey’s management does not manage the company quarter to quarter, which I admire, and instead focuses on long-term growth.
CASY has just scratched the surface as it puts its stores in rural America, including recent expansions into Tennessee and Kentucky, so there are still plenty of opportunities ahead for this one-stop shopping store and gas station.
Sales of freshly prepared foods have also been strong, and the company expects double-digit growth in this category. If gasoline prices stay down, lower margins on those sales could limit earnings growth in the current fiscal year to less than 10%. However, gas prices could easily move higher, and further down the road, the comparisons become favorable, which actually serves to reaccelerate growth.
eBay (NASDAQ:EBAY) is also slightly above our buy limit, but I encourage you to grab it on pullbacks if you don’t already own it. Growth should be solid for the remainder of the year, even in this sluggish environment, led by the increasing popularity with consumers of eBay’s “Marketplace” auction business and its PayPal electronic payment division. Revenue in these units grew 11% and 32% in the first quarter, which led to an 18% increase in adjusted earnings per share.
I expect earnings to continue to grow rapidly as the faster-growing PayPal becomes a larger part of the company’s business (it accounted for 40% of total revenues in the first quarter). The number of PayPal accounts increased 12% in the first quarter, so growth prospects remain bright. And, the company’s GSI e-commerce business, which builds and designs online shopping sites for companies, is another area where I see great potential.
The stock is trading at a little over 18X expected 2012 earnings of $2.35 a share, which is compelling for a company that should see 15% earnings growth during the next few years and has two very strong consumer franchises.
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