4 Growth Stories For Your Portfolio
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 companies that prominent value investors have recently added to their portfolios. I like to follow stocks that top hedge funds bought in recent quarters and buy/sell them at proper technical entry points. I explained in one of my posts at Warren Trades that top value managers have more resources and information than any individual investor to analyze companies. In general, they do not buy stocks for day trading or short term trading. 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.
A strong play for the smartphones and tablets boom
Arm Holdings (NASDAQ: ARMH) is the best pick in the semiconductor industry. The company is growing strong, evidenced by the fact that its cash and short-term investments position just reached an all-time high of 442 million pounds ($710 million) as of Sept. 30. ARM sells its chip blueprints to companies like Qualcomm, Google, Apple, or Microsoft and receives royalties from shipments of semiconductors. Francis Sideco, researcher at IHS iSuppli said about ARM: "Without ARM, it would take a device the size of a computer to accomplish what the smartphones in our pockets are capable of." The company enters the final quarter of 2012 with record order backlog and a robust opportunity pipeline. In fact, royalty revenues are at record levels, volume shipments at record levels, licensing at record levels, and its already record backlog is up 6%. The demand for high-performance, low-cost computing is driving ARM licensing revenues that increased by 27% year-over-year and significantly outpaced the semiconductor industry. I believe this stock is one of the best bets on the growth in functionality of consumer products, like smartphones, tablets, and so on. ARM's chips have become the most popular standard for cell phones and tablets and are found in hundreds of millions of other devices, from digital cameras to disk drives. Its market share in handsets is more than 90%, and its stock has more room to go if this secular trend continues. ARM has a strong last quarter EPS growth of 29% and 24% revenue growth. Its 3 year annual average EPS growth is 41% while it grew sales at 24%. ARM has a ROE of 15% and a big net profit margin of 27%. This stock has all the items I look for in a growth story.
A simple retail growth story
Vitamin Shoppe (NYSE: VSI) operates a simple concept, sell vitamins to a growing number of health conscious customers. As it is wrote in Warren Trades, I like to invest in simple companies. The company reported strong quarterly results and it is expected to increase its growth next year. Vitamin Shoppe’s quarterly revenues rose 14.4% year over year to $239 million fueled by 1) a 9.6% increase in comparable store sales, 2) opening new stores, and 3) a 16.9% increase in e-commerce sales. According to Vitamin Shoppe’s investor relations website, and its SEC filings, the company has 3 strategies to keep performing. First, Vitamin Shoppe will continue to expand its US store base with 55 new locations in 2013 (vs. 52 in 2012). Of the 55 stores, Vitamin plans to open two in smaller markets to test how a smaller store performs. This small market test will be a store that is about 20% smaller than Vitamin Shoppe current model with approximately the same assortment and the same knowledgeable service levels. With lower rent and less capital, management believes to bring the same Vitamin Shoppe experience to customers in markets that could not effectively be reached with the current prototype. If successful, this will extend Vitamin Shoppe’s growth opportunity beyond the current estimate of 900 stores in the US market. In addition, the company will continue to improve its internet platform to support the total customer experience at Vitamin Shoppe. Finally, management plans to enter the Canadian supplement market in 2013 with two stores and also start expanding to other countries. Prominent investor Ken Fisher recently bought this high growth stock, which reports a strong 3 year average annual EPS growth of 66% and 14% revenue growth. This is impressive growth for a retailer. I like this company.
A growth SaaS story
Ellie Mae (NYSE: ELLI) solves a broad mortgage industry need for better mortgage underwriting practices. The number of steps and parties involved when you apply for a mortgage is large, and the process was ripe for "re-engineering." According to Tom Peters, the average mortgage loan is handled by 61 people, and requires 45 days to travel from application to funding. Ellie Mae SaaS (software as a service) solution brings all involved parties together, saving a lot of time and money, reducing the average cost per mortgage by a whopping $3000, and optimizing the whole process. The success of Ellie Mae model is reflected in its strong quarterly EPS growth of 289% and revenue growth of 87% y/y.
The company's rapid growth shows no signs of slowing with record bookings in the quarter. Ellie also plans to add additional salespeople in Q4 to boost growth in FY13 and beyond. I like the fact that management was conservative with its guidance for FY13, projecting revenues to be up 25% year over year (vs. Street estimate of +19%). This projection assumes 19% year over year deterioration in industry loan volumes. This conservative assumption could generate positive surprises if the industry returns to historical average mortgage volumes, which is not impossible considering the current housing recovery.
The stock to focus in India
HDFC Bank (NYSE: HDB) is India's second largest private sector lender with a balance sheet of INR 3,600 billion. Earnings per share for HDFC Bank have grown at a rate of 26% over the last 3 years as the loan portfolio continues to expand. The gross NPAs for the bank stand at 1% of gross advances and net NPAs at 0.2% of net advances. The bank is also growing strongly in savings deposits (19% y/y) and current deposits (7.5%).HDFC is one of the fastest-growing banks in rural areas. In fact, bank branches in rural India increased from 21,000 in early 2010 to 138,500 so far in 2012. This is a strong capitalized bank, with proven management team that reports solid top and bottom line growth. Considering India's economy future growth, HDFC is a stock worth researching. Ken Fisher bought this stock in the recent quarter.
Investors should always be looking for growth. These companies are growing both top and bottom lines driven by expansion plans (Vitamin Shoppe), secular technology trends (Ellie Mae and ARM Holdings), or just growing demographics (HDFC Bank). I appreciate your reading and wait for your comments on which stock you like most!
martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend ARM Holdings and Ellie Mae. 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.