4 Stocks with Growth & Income to Buy Now

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

For many investors, finding the right balance of growth and income in their portfolio is a challenge. If you are too aggressive with growth stocks, you can find a big chunk of your portfolio washed away with a change in market sentiment. If you are too conservative, you might fall short of your goals for your longer-term net worth. The best of both worlds is hard to find. However, one way I stocks that are both growing and produce income is through the use of a stock screener. Not surprisingly, one of my favorite screeners is The Motley Fool CAPS Screener. I recently ran a screen for stocks that paid a yield of at least 3%, had either a 4 or 5 star rating (the two highest) from the CAPS community, and were in the “electronics” industry.

The “electronics” industry includes semiconductor stocks, which is really what I was aiming for. There appears to be three reasons to favor semiconductor companies. First, semiconductor stocks are essentially cyclical stocks, because they have higher earnings when the computer industry is on a replacement cycle. With Gartner calling for PC shipments to increase from about 368 million this year to near 400 million next year, this 8.7% growth bodes well for the semiconductor industry.

Second, with the huge boom in smartphones and tablets, semiconductor producers can benefit from these two markets. Last, many semiconductor companies create significant cash flow and pay well-covered dividends. The screen turned up the following four potential candidates: Applied Materials (NASDAQ: AMAT), Cypress Semiconductor (NASDAQ: CY), Intel (NASDAQ: INTC), and Microchip Technology (NASDAQ: MCHP). To get an idea of how the market values the growth potential of each of these companies, let's take a look at their expected P/E ratios and growth rates.

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>P/E on '12 Earnings</strong></p> </td> <td> <p><strong>Growth Expected</strong></p> </td> <td> <p><strong>PEG</strong></p> </td> </tr> <tr> <td> <p>Applied Materials</p> </td> <td> <p>15.13</p> </td> <td> <p>8.00%</p> </td> <td> <p>1.89</p> </td> </tr> <tr> <td> <p>Cypress Semiconductor</p> </td> <td> <p>15.3</p> </td> <td> <p>11.72%</p> </td> <td> <p>1.31</p> </td> </tr> <tr> <td> <p>Intel</p> </td> <td> <p>10.59</p> </td> <td> <p>11.86%</p> </td> <td> <p>0.89</p> </td> </tr> <tr> <td> <p>Microchip Technology</p> </td> <td> <p>15.59</p> </td> <td> <p>10.00%</p> </td> <td> <p>1.56 </p> </td> </tr> </tbody> </table>

While there are clear differences in valuation, you can see the 8.7% predicted growth of the PC industry built into analysts assumptions. Each company except one is expected to grow earnings at a better than 10% clip. That being said, Intel looks like the clear valuation leader, as it is the only company that sells for a multiple less than its growth rate. (Intel – 4, Cypress – 3, Microchip – 2, Applied Materials – 1)

Unfortunately, analysts' growth projections are not always correct, so we have to be careful about taking these numbers at face value. One way I've found to try and substantiate if a company will grow the way analysts expect is to see how the company has done versus estimates in the past. To compare different companies, I look at their last four quarters and whether they met, beat, or missed earnings expectations.

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Beat Expectations</strong></p> </td> <td> <p><strong>Missed Expectations</strong></p> </td> <td> <p><strong>Avg. Beat or Miss</strong></p> </td> </tr> <tr> <td> <p>Applied Materials</p> </td> <td> <p>4</p> </td> <td> <p>0</p> </td> <td> <p>20.53%</p> </td> </tr> <tr> <td> <p>Cypress</p> </td> <td> <p>3</p> </td> <td> <p>0</p> </td> <td> <p>11.60%</p> </td> </tr> <tr> <td> <p>Intel</p> </td> <td> <p>4</p> </td> <td> <p>0</p> </td> <td> <p>5.33%</p> </td> </tr> <tr> <td> <p>Microchip</p> </td> <td> <p>1</p> </td> <td> <p>0</p> </td> <td> <p>0.00% </p> </td> </tr> </tbody> </table>

Applied Materials’ consistent history of beating estimates helps explain why we saw its stock valued above its growth rate. The same logic might hold true with Cypress as well. Intel looks like an even better value with its consistent performance. Microchip is the laggard of the group, and this gives even more credence to the fact that its shares are relatively overvalued, as we saw above. (Applied Materials – 4, Cypress – 3, Intel – 2, Microchip – 1)

Knowing what to expect of earnings is a good first step, but for many investors a company's cash flow is just as important. I use current quarter free cash flow divided into quarterly sales to get an idea of how much cash a company generates from $1 of sales. This allows us to compare the relative efficiency of companies that are different sizes. Microchip generated $0.34 of free cash flow per $1 of sales. Applied Materials comes in second at $0.26 per $1 of sales. It's close, but Cypress narrowly beats out Intel with $0.17 of free cash flow versus $0.15 at Intel. (Microchip – 4, Applied Materials – 3, Cypress – 2, Intel – 1)

Now that we know each company produces generous amounts of cash flow we can take a look at the dividend yield of the companies. It's no surprise that each company's free cash flow payout ratio is relatively low, considering their cash generating capabilities. The best combination of yield and payout ratio is what I use to determine a winner. Here is how I would rank these companies: 

<table> <tbody> <tr> <td> <p><strong>Name</strong></p> </td> <td> <p><strong>Yield</strong></p> </td> <td> <p><strong>Free Cash Flow Payout</strong></p> </td> <td> <p><strong>Rank</strong></p> </td> </tr> <tr> <td> <p>Applied Materials</p> </td> <td> <p>3.22%</p> </td> <td> <p>18.82%</p> </td> <td> <p>4</p> </td> </tr> <tr> <td> <p>Cypress</p> </td> <td> <p>4.11%</p> </td> <td> <p>49.81%</p> </td> <td> <p>1</p> </td> </tr> <tr> <td> <p>Intel</p> </td> <td> <p>3.97%</p> </td> <td> <p>50.89%</p> </td> <td> <p>2</p> </td> </tr> <tr> <td> <p>Microchip</p> </td> <td> <p>4.28%</p> </td> <td> <p>57.09%</p> </td> <td> <p>3 </p> </td> </tr> </tbody> </table>

It appears that Cypress offers the best combination. I'm sure some would argue about the Intel versus Microchip trade-off, but I favor Intel because investors aren't giving up much yield, but the payout ratio is about 7% lower. Applied Materials has by far the lowest payout ratio, but the company also pays the lowest yield.  (Cypress – 4, Intel – 3, Microchip – 2, Applied Materials – 1)

Our totals are Cypress – 12, Intel – 10, Applied Materials – 9, and Microchip – 9. I tend to agree with the final scores. Cypress offers investors a good mix of growth (11.72%) and income (4.11%). I'm sure that some people would prefer Intel, since the company has the lowest relative valuation and pays nearly the same yield as Cypress. With Applied Materials, you have to assume the company will continue beating expectations to justify its valuation, and in the meantime you collect the lowest yield. Microchip pays the highest yield, but with the highest payout ratio. In addition, Microchip has the second highest valuation and no history of consistently beating estimates.

That being said, there are things to like about each of these companies. This isn't a formal recommendation to buy, so I would suggest investors use this information as a jumping off point for their own research. With higher expected PC sales, growing sales in tablets and smartphones, and an improving economy, these companies could give you just the type of growth and income you need in your portfolio.

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MHenage owns shares of Intel. The Motley Fool owns shares of Intel. Motley Fool newsletter services recommend Cypress Semiconductor and Intel. 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.

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