Cheap, Quickly Growing Stocks for 2013 (Part II)

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In my recent article featuring fast growing businesses that delivered high returns on investment on debt-free operations, I analyzed Apple and American Public Education. In this post, I want to point out two more companies that have similar characteristics, including (1) high 5-year EPS growth,  (2) high return on investments, (3) minimal long-term debt, and (4) low PEG valuation.

A Market Leader in the Chinese Search Market

The fast growing, well-known Chinese Internet giant (NASDAQ: BIDU) appeared in the list this time. This company has benefited a lot just by cloning Google’s (NASDAQ: GOOG) business model and applying it in the Chinese market. Because Google couldn’t operate in China, Baidu has been dominating the search market in the country, which has the largest population on Earth (and therefore the largest amount of potential customers). Even though Google is still dominating the world’s search market with its 88.8% market share, while Baidu accounted only for 3.5%, Baidu is taking a whopping 73% of the Chinese search market.

But With a Competition Threat

However, since August Baidu has seen rising competition from the search engine of Qihoo 360 Technology (NYSE: QIHU). Qihoo’s web portal and browser has switched its default search engine from Google and Baidu to its own search services, grabbing many accidental users overnight. Within just three months from launch, Qihoo has taken up to 10% of the Chinese market share. However, as Baidu’s traffic reliance on Qihoo is quite low, along with the market leading position in the search market, Baidu still has plenty of room for potential future growth.

In the past 5 years Baidu experienced great growth in earnings. Its EPS has grown more than 10 times, from CNY 1.81 ($0.29) to nearly CNY 19 ($3.05). Trailing twelve months, the return on invested capital was as high as 47.17%. The high return on invested capital was generated via low leverage level. The company had no long term debt, CNY 23.18 billion ($3.72 billion) in total stockholders’ equity and nearly CNY 21.3 billion ($3.42 billion) in cash. At the current trading price of $99 per share, the total market capitalization is $34.61 billion. The market is valuing Baidu at 22.3x trailing earnings and only 0.1x PEG.

And a Fast Growing Pharmaceutical Company

The second growing and cheaply valued business in this article is a biopharmaceutical company thats main product was H.P. Acthar Gel, developed to treat 19 indications to help patients with serious medical conditions such as rheumatic disorders, infantile spasms, etc. It is Questcor Pharmaceuticals (NASDAQ: QCOR). Fool contributor Keith Speights has mentioned that Questcor had a pricing advantage, by simply raising its prices for its Acthar products from $2,000 in 2007 to as high as $30,000 per vial. In the last 5 years, its EPS has grown in a fluctuating way from $0.51 to $1.21 per share. Since 2007, its return on investment has also fluctuated in the wide range of 35.4% - 113.47%. Its trailing twelve months ROIC was 113.47%, with no help from leverage. As of September 2012, Questcor had $122 million in total stockholders’ equity, no debt, and as much as $112 million in cash. Currently, Questcor seems to be cheaply valued. With the current trading price of $26.93 per share, the total market capitalization is $1.57 billion. The market is valuing Questcor at 10.4x trailing earnings and only 0.2x PEG.

Foolish Bottom Line

Indeed, those two stocks mentioned above, a leading player in the Chinese search engine market, Baidu, and a fast growing healthcare business, Questcor, seem to be quite suitable for a growth portfolio in 2013. In the next article, I will uncover two more quickly growing stocks that investors could bet on for the next year.




hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Baidu and Google. Motley Fool newsletter services recommend Baidu and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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