4 Growth Stocks You Should Focus on in this Market

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

As explained in my blog Warren Trades, I like companies that show consistent earnings and sales growth, and in general have price-to-earnings ratios higher than those of the average stock simply because they have a record of better than normal earnings performance. I like to buy them when the market under values its future growth. Typically, growth stocks have a high-quality, repeat-type product or service that generates superior profit margins, and a return on equity of at least 17% to 50%.  These stocks are doing better than the overall market, and several institutional investors have been buying them in the past quarters.

A monopoly in medical devices

Intuitive Surgical (NASDAQ: ISRG) manufactures, and markets the da Vinci Surgical System, an advanced robot-assisted surgical system that represents a new generation in surgery. The da Vinci Surgical System is the only commercially available technology that can provide the surgeon with intuitive control, range of motion, fine tissue manipulation capability, and 3-D visualization characteristics of open surgery, while simultaneously allowing the surgeons to work through the small ports of minimally invasive surgery (MIS). In other words, Intuitive is a medical device company that operates in a niche with no direct competition. I like these kind of companies.

Intuitive also generates recurring revenue after the initial sale of the da Vinci System as its customers use the system to perform surgery and, in the process, buy and consume Intuitive EndoWrist instrument and accessory products. In fact, recurring revenues increased 24% year over year in the third quarter with less than 20% growth last year.

Management is optimistic about Intuitive's future growth, driven by rising sales in international markets. Revenues from overseas markets were $115 million in the third quarter, up 22% year over year. Ex-U.S. unit sales were 41 systems compared with 34 a year-ago, mainly on account of higher sales in Japan, one of the strongest markets for Intuitive. Management just upgraded its revenue guidance and operating income margins for FY 2013. I think valuation is neutral at 29x consensus analyst forward P/E, considering that the company has an estimated growth rate of 20%. Top portfolio managers bought the stock last quarter, including Andreas Halvorsen (Viking Capital) and Joel Greenblatt (Gotham). The stock is holding very well despite the current market correction.

A growing online travel franchise

TripAdvisor (NASDAQ: TRIP) is the largest online global resource for travel hotel opinions, reviews, and ratings. TripAdvisor's lead in collecting and curating travel reviews is extremely difficult to replicate at scale. While some may fear  potential competition from Google's (NASDAQ: GOOG)  entrance into online travel research market, I think that consumers prefer TripAdvisor. For example, TripAdvisor, with its 75 million reviews, has a much bigger scale than Frommers. According to ComScore, the monthly uniques visitors for TripAdvisor is also far greater than Frommers, as 54 million unique users visited TripAdvisor in June, compared to the 1.7 million that visited Frommers.

TripAdvisor had a strong third quarter. The company generated record quarterly revenue of $212.7 million and adjusted EBITDA of $107.1 million. Traffic to TripAdvisor continues to be strong, as total traffic grew in the over 30%. While mobile represents a relatively small portion of total revenue (exact amount wasn't specified), management pointed out that tablets now represent about 75% of mobile revenue, with the monetization level approaching that of desktop. This could be a huge opportunity for TripAdvisor. I am confident that the business is strong and will keep growing, but shares are not cheap at 12x 2013 consensus EV/EBITDA (the higher-end of the peer group).  

Cheap + Growth: Look here

AerCap (NYSE: AER) is a stock that is holding better than the rest of the market. This is an undervalued stock to play the secular trend of airplane leases. In fact, 30% of commercial aircraft are leased, the highest rate in history, which represents a 700% increase over the last 20 years. Considering that acquiring a modern aircraft is expensive for start ups or established airlines, leasing is an attractive option to minimize costs and stay competitive. AerCap trades at just 6x forward P/E, and has an estimated EPS growth for FY 2013 of 24%. From 9 analysts that follows this stock, 8 issued a strong buy recommendation and just 1 said you should hold. This is a stock to follow very closely.

Buy with Warren Buffett

Recently, the Department of Agriculture crop report showed a notable decline in grain inventory. From that report it became clear that while the drought has hampered corn production to some extent, it had not destroyed all the crop for this year and farmers will invest in the latest machinery to maximize productivity for what could be a record FY 2013 for the farming sector. Deere (NYSE: DE) will benefit from this trend. I think it is a unique time in the whole agriculture sector as the drought in North America generated lower yields that were mitigated by higher crop prices and extensive insurance coverage for row crop farmers. Record farm income is being projected for the U.S. and demand for high horsepower equipment remains elevated.

Warren Buffett seems optimistic in this trend as he recently initiated a position in the stock at current prices. I think the stock is a compelling dividend play (Deere plans to increase its dividend payout ratio on an average of 25% to 35% every year) that is trading at undervalued multiples. In fact, Deere's trailing P/E is just 11x, compared to 14.7x for the SP&500.

martinzaldua has no positions in the stocks mentioned above. The Motley Fool owns shares of Google, Intuitive Surgical, and TripAdvisor. Motley Fool newsletter services recommend Google, Intuitive Surgical, and TripAdvisor. 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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