3 Fundamental Growth Picks for Your Portfolio
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While investing, it’s always advisable to pick growth stocks from recovering industries. However not all such stocks perform spectacularly, and one needs to take a look at the financial metrics for valuable clues. The point being, ordinary stocks may perform well in a recovering industry, but a fundamentally sound company can impress the industry.
My stock screening filters were:
1) Market Cap > $10 billion
2) Price/Free Cash Flow > 10x
3) Debt/Equity < 10%
4) Gross Profit Margin > 50%
5) Quick Ratio > 3x
6) EPS growth this year > 10%
Three companies popped up on my screener, and here are a few reasons why these companies may continue to impress the street in 2013.
Qualcom (NASDAQ: QCOM)
Qualcomm is enjoying a near to monopoly, in high performance mobile chips. According to benchmarks, the company has successfully been able to beat NVidia’s Tegra 3. Several reports claim that the upcoming 2.5Ghz Quad Krait, Snapdragon S4 Prime processors, would be around 30-50% faster than NVidia’s (NASDAQ: NVDA) upcoming Tegra 4 processors. Both companies are expecting to release their products in mid-2013.
Additionally, the adaption of existing Snapdragon S4 processors is picking up pace. HTC recently released a sub £250 Desire X. The smartphone boasts of a Snapdragon S4, 1 GHz dual core processor, which pretty much beats HTC’s competition. With an entry into the “heating up” mid-range segment, we could safely expect more migrations Qualcomm Snapdragon S4 chips in 2013.
Analysts expect 5 year EPS growth to be around 20%, which equates to 248% returns (approx.) in just 5 years.
Fastenal company (NASDAQ: FAST)
US housing starts are at their 4 year highs and new home sales are up 17.2% from October 2011. With Fed’s liquidity injections in a low interest rate environment, dipping unemployment rates and increasing prepayments, I believe housing recovery will further speed up.
Fastenal Company is a wholesaler and retailer of general building materials. The company has been performing well, and over the last 5 years its shares are up by 97.84%. With little or no debt on the books, earnings retention of more than 50% and cash reserves of $195.6 million, Fastenal Company looks financially sound.
Fastenal’s earnings growth, revenue growth and margins are higher than the industry average. The company has outperformed most of its peers in terms of stock returns. Additionally the company opened 73 new stores in the US, and the management expects continued rapid expansion in 2013. At the current price, shares of Fastenal Company yield a modest 2% and analysts expect the 5 year EPS growth to be over 17%. This means, its shares could double in value in about 4 years.
Cerner Corporation (NASDAQ: CERN)
With the dipping unemployment rates and rising US per capita income, healthcare spending is expected to increase, indicating a bull run for healthcare players like Cerner Corporation. But the new medical rules discourage patient readmissions, and hospitals would be penalized for patients being readmitted within 30 days of discharge.
Let’s present a situation. If a patient gets discharged from hospital X, and gets admitted to hospital Y within 30 days, for the same disease/problem, hospital X would be penalized.
The situation gets challenging, as medical records now need to be digitally stored and shared across healthcare networks. With the onset of 2013, we can expect digitalization of medical records and increased data sharing amongst hospitals. This presents tremendous growth opportunities for the leading medical software solution provider, Cerner Corporation.
According to Reuters,
Cerner’s solutions are licensed by approximately 9,300 facilities globally, including more than 2,650 hospitals; 3,750 physician practices 40,000 physicians; 500 ambulatory facilities, such as laboratories, ambulatory centers, cardiac facilities, radiology clinics and surgery centers; 800 home health facilities; 40 employer sites and 1,600 retail pharmacies.
A major share of the company’s revenues comes from EHR software solutions, and we can safely expect Cerner’s revenues to surge in the coming year. The company has been reporting staggering results, and over the last 5 years its shares are up by 173.7%. Analysts expect the 5 year EPS growth to be around 20%, which means its shares could double in value, in less than 4 years.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services recommend NVIDIA. 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!