3 Growth Stocks I Bought Last Week
Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Most of my new investments over the past few years have been in dividend paying stocks. As I transition to retirement I will need to supplement my pension and part-time work income.
However, last week I bought three growth stocks to address the other part of my plan to ensure that my portfolio can also reap even higher returns than those typically offered by the stalwart, but relatively slower growth companies that pay dividends.
I had all three on my watchlist and I finally pulled the trigger based upon the results of my review of the long-term fundamentals of each.
For growth stocks I tend to look for the following characteristics and "rules-of-thumb":
1. Consistent long-term EPS and revenue growth with the likelihood that it can continue in the future. EPS growth rates of 15% or higher over a three to five year period is a feature of an above-average company. Future growth potential can be gleaned from many financial publications and even the company's own filings and news releases. If the company plans to expand to new geographical locations, that would be considered a positive.
2. A P/E ratio that doesn't significantly exceed the growth trend and is in-line with the past and others in the same industry. For example, with EPS growth in the 15% to 20% range you probably wouldn't want the P/E ratio to be much bigger than 20. If the historical average of the P/E ratio was 15 and it has started to drift into the 20 to 25 range that might raise a red flag also.
3. Positive free cash flow.
4. Good management practices. If the founder is still in charge that is a good indication that management has a vested interest in the long term. If the business just brought in someone from outside the industry with little experience that may not be a good sign. A pay structure based upon long-term growth and not short-term stock performance is a plus. Check the filings for more information.
5. No or low long term debt levels. One good measurement is the long term debt/equity ratio. A high value is a negative.
6. Smaller companies are more nimble and typically grow faster than bigger firms. Look for companies with market caps or revenues of $2 billion or less.
7. It's good to have 2nd or 3rd opinions. I try to confirm my bias by looking at how others view the stock. I usually don't need to look further than The Motley Fool’s CAPS community.
The first stock that I bought was Boston Beer (NYSE: SAM). The brewer of my favorite beer, Samuel Adams Boston Lager, has a market cap of $1.5 billion and has been steadily increasing revenues and earnings by 20% to 25% per year over the last five years. It has $53 million in free cash flow and little debt.
The company management is one of the best in any business. The founder and chairman, Jim Koch, sponsors a program that provides startup funding for those wanting to go into the beverage, food, or entertainment business and still uses an old family recipe for the lager. At the flagship brewery in Boston you can take an informative tour of the facilities and sample the product at its conclusion. There is also a gift shop where you can buy the distinctive Sam Adams glass.
The stock has the 2nd highest possible rating with 4 stars out of 5 and 96% of the CAPS community think it will outperform the market going forward.
My second purchase was Bio-Reference Laboratories (NASDAQ: BRLI). The NJ-based provider of medical testing services is the largest independent lab in the NY-NJ-CT tristate area and also has patient service centers in Florida, Texas, Pennsylvania, Maryland, and Rhode Island, and brands itself as specializing in woman's health issues and cancer screening. It receives most of its orders, over 5 million annually, directly from doctor's offices.
Bio-Reference has a $718 million market cap with earnings and revenue increasing 24% and 20%, respectively, on average over the past 5 years. It has no debt and $16 million of free cash flow. The CAPS community rated it at 4 stars and most thought it would outperform the broader market.
My final purchase was Virtus Investment Partners (NASDAQ: VRTS). I happened to read about the company in a local magazine one day and it was identified as being one of the best places to work for in Connecticut. That's a sign of good management practices. The firm sells various types of financial products such as mutual and fixed income funds and offers investment advice. It has headquarters in Hartford, less than 5 miles from my home.
It was spun off of its "mothership" a few years ago. An analyst friend of mine said it's always a good idea to look at the company being jettisoned in such a deal. Revenues have steadily increased and earnings have accelerated recently. The company has an $840 million market cap, low debt, and free cash flow of over $12 million. The CAPS community rates it at the highest level, 5 stars, and most think it will outperform the S&P500 over the long term.
I had considered two other businesses for the growth portion of my portfolio but decided to go for the three companies listed above instead.
Buffalo Wild Wings fits into the small company profile with a $910 million market cap and revenues of $785 million. Panera Bread is on the outside edge with a market cap of about $4.9 billion and revenues of $1.82 billion.
Both have averaged solid growth rates in the 15% to 25% range and have expansion plans in place, possess low debt levels, had positive free cash flow, good CAPS ratings, and sound management. As far as value is concerned, Panera might be a bit expensive with a P/E ratio of 29 that is higher than its historical average and the rest of the industry. Buffalo Wild Wings is just slightly higher than its average and the industry as a whole with a current P/E of 25.
I will keep my eye on these two for possible future purchases. In the meantime, I will enjoy my Sam Adams beer while watching the value of my three new investments go up.
Mathman6577 owns shares of Bio-Reference Laboratories, Boston Beer, and Virtus Investment Partners, Inc. The Motley Fool owns shares of Bio-Reference Laboratories, Buffalo Wild Wings, Panera Bread, and Boston Beer. Motley Fool newsletter services recommend Buffalo Wild Wings, Panera Bread, and Boston Beer. 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!