3 Stocks Any Growth Investor Should Consider
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I think it is important to consider stocks that prominent value investors recently added to their portfolios. I like to follow great stocks that top hedge funds bought in recent quarters and buy/sell them at proper technical entry points. I explained in one of the blog posts in Warren Trades that top value managers have more resources and information for analyzing companies than any individual investor has. Hedge funds with billions under management are long term oriented, so tracking their picks is one important step when analyzing stocks. In this article I will detail recent picks from 4 top value investors.
One of the best (but expensive) players in the SaaS segment
Netsuite (NYSE: N) is expensive, but the company keeps growing and surprising both analysts and investors. According to Barclays, the Q3 earnings season was characterized by revenue underperformance, as weak spending continued in Europe and uncertainty around fiscal policy restrained growth in the America's. Software as a service (SaaS) was the one structural theme that continued to work, as none of the vendors in Barclays coverage missed consensus on top line. The value proposition of SaaS seems especially attractive, as it provides stability, cost reductions, and improved efficiencies.
In the last earnings report, Netsuite reported solid 3Q results with upside to revenue, billings, operating margin, and EPS. In fact, revenues grew by 31% year-over-year, to a record $79.8 million for the quarter, and non-GAAP net income also grew 49% over the same quarter a year ago. In addition, Netsuite saw another quarter of very healthy year-over-year growth in operating cash flow. Q3 operating cash flow was up 61% from $9.4 million in Q3 of 2011, and the company's year-over-year total deferred revenue grew an impressive 40%.
One of the most important items was the fact that average selling price across all Netsuite offerings was up more than 11% over the prior year. This growth in average selling price across the full product line reflects the increasing value customers place on Netsuite's powerful offerings. The company reported a strong 3 year average annual EPS growth of 65% and 21% 3 year sales growth.
My view is that the company will keep growing, driven by the recently released product SuiteCommerce (rolled out this year), which is changing the playing field, further differentiating what NetSuite provides to the market from the old on-premises ERP systems of the past. Netsuite is also expanding geographically, as the company saw strong new business bookings performance in North America and APAC, while EMEA basically held steady with last year's performance. Asia Pacific was Netsuite's fastest-growing market year-over-year, and the company also saw healthy growth in the double-digits in North America and EMEA.
As I explained in one Warren Trades article, Netsuite shares are ideal from a trading perspective but risky for a long term investment. Netsuite trades at ~10x consensus 2013 revenue estimate on an enterprise value basis and 72x 2013 free cash flow estimate. These multiples are well above the 4.8x EV/Revenues and 41x P/FCF averages at which a group of other industry-leading SaaS peers are trading. In other words, future growth is already priced into shares, and expectations for margin expansion are only modest. Not the best picture for a buy and hold investor, but maybe great for a short term trader who profits from weekly or monthly momentum trends. Fidelity and Driehaus Asset Management bought the stock last quarter.
Coke, Pepsi or Beer? Ball profits from each!
Ball Corp. (NYSE: BLL) is the largest manufacturer of beverage cans in North America, and supplies products to such giant customers as Coca-Cola, Pepsi, AB InBev and MillerCoors. According to Zacks, this provides a competitive edge to the company and strengthens its pricing power in the market. Ball Corp. is also a manufacturer of metal and plastic packaging, primarily for beverages and foods. It also supplies aerospace and other technologies and services to government and commercial customers. This is a solid, predictable business that is great for long term oriented investors.
The company recently reported a very good 9-month performance that was slightly above management expectations. Ball is on track to achieve the goal of 10% to 15% diluted earnings per share growth for 2012. According to Ball's earnings call, the company will keep performing, driven by further emerging market growth, mix shifts to more specialty containers, more normalized weather in North America and Europe, and continued growth in aerospace.
The company plans to expand its global metal beverage can business. Accordingly, Ball acquired four low-cost metal beverage packaging manufacturing plants from AB InBev in the U.S., and announced plans to acquire the remaining 65% interest in a joint venture metal beverage can and end plant in China. Ball is not expensive, as its trailing P/E is just 14.7x, compared to the 16.4x average for the peer group and 14.4x for the S&P 500. This multiple does not reflect Ball's 3 year annual growth rate of 16% and sales growth of 11%. SAC Capital Advisors bought shares of Ball in the recent quarter.
A solid retail growth story
In a recent report, Needham projected that PetSmart's (NASDAQ: PETM) sales will continue to be strong across all merchandising categories, expecting continued margin expansion and solid growth. According to the American Pet Products Association, in 2012 U.S. households spent over 50 billion dollars on their pets. Since 1994, the amount of money spent on pets has increased every year, even during the economic recession. PetSmart is different from other retailers (Wal-Mart or Target), as it offers an array of services to meet the needs of people who are passionate and knowledgeable about pets. By offering more specialized services and products, PetSmart makes 4.6 times greater annual gross margin per customer.
The company is a strong grower, reflected in its 3 year average EPS growth of 25% and 9% sales growth. In the recent report, the company reported net income growth of 28% and same-store revenue growth of 7%. PetSmart's performance in the second quarter was due to the strengths across all three merchandising categories: consumables, hard goods and live goods, as well as services. The company will keep growing, driven by its comparative everyday low price strategy, coupled with its commitment to uniquely engaged in-store experience that is not easily duplicated. This approach has led to continued growth, even in today’s challenging economic environment. The company is not expensive at 17x forward P/E and just 1.1 P/S. Tudor Investment Corporation bought the stock in the recent quarter.
martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of PetSmart. Motley Fool newsletter services recommend Netsuite and PetSmart. 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.If you have questions about this post or the Fool’s blog network, click here for information.