3 Growth Stocks That Value Investors Should Love

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

Most savvy stock market investors tend to fall into one of two groups: growth investors, or value investors. Growth investors favor companies whose revenues and profits are experiencing rapid growth. These are usually less mature companies that are still in the high-growth phases of their existence. As a result, growth investors more often than not favor smaller companies that don’t pay dividends. Instead, they reinvest their profits back into the business, to ensure the days of high growth continue unabated.

Value investors, on the other hand, prefer to seek a meaningful margin of safety from their equity investments. Followers of this philosophy rely on the teachings of the fathers of value investing, namely Benjamin Graham and Warren Buffett, who preach the critical task of purchasing stocks for less than their intrinsic value. Low price-to-earnings and price-to-cash flow ratios are commonly used analysis tools for the value investor.

Finding common ground with 3 great stocks

While most stocks tend to display characteristics of one or the other group, nevertheless, with a little bit of due diligence, it is indeed possible to find such stocks that display characteristics found among both growth and value stocks. For example, Baidu (NASDAQ: BIDU) seems to fit the bill. Baidu is a search engine giant and is commonly referred to the Google of China. Whereas Google trades for a trailing price-to-earnings ratio of 25 times and holds a market value in excess of $260 billion, Baidu is a much smaller rival with a more attractive valuation profile. Shares of Baidu were hit hard over the last year, falling from $150 per share to its current level of $88 per share, and as a result, the stock currently exchanges hands for only 18 times earnings, yet has a growth trajectory befitting a higher valuation.

The market was especially concerned over the company’s most recent earnings report, even though the underlying numbers looked very solid. Total revenue increased 42% in the fourth quarter and 53% for 2012, year over year. Furthermore, fiscal year 2012 net income increased 58% from 2011.

Unfortunately, even those kinds of growth rates weren’t enough to stop the stock from falling 10% on the day of the earnings announcement. Interestingly, little in the earnings report implied that the company's growth is slowing down. The company expects growth to continue, at least for the near future. Baidu currently expects to generate total revenue ranging from $945 million to $975 million for the first quarter of 2013, representing a 38.1% to 42.6% year-over-year increase.

Another stock struggling against the market's seemingly irrational expectations is Dollar Tree, (NASDAQ: DLTR) which has been besieged lately as the market worries about potential headwinds to the company’s customer base, including the payroll tax hike and possible spending cuts. Because of these concerns, Dollar Tree has lost 15% of its value since last June, leaving the stock trading at a trailing P/E ratio of 17 times.

Meanwhile, Dollar Tree executed very well last year, despite the stock’s struggles. Total revenue climbed 11.5% in fiscal 2012, and are up almost 60% since 2009. Moreover, the company’s diluted earnings per share rose by a full third in fiscal 2012, year over year.

Not only that, but consider that Dollar Tree is managed extremely effectively. The company earned returns on assets and equity of 24.4% and 41.1%, respectively, during 2012. In addition, the company is in sound financial position, with a long-term debt to equity ratio of just 15%.

Not to be outdone, earlier this year, consumer fashion company Fossil (NASDAQ: FOSL) reported record fourth-quarter and fiscal 2012 results. During the quarter, net sales and earnings per share increased 14% and 34%, respectively. Earnings per share for the full year hit a record $5.59, rising 21% from the year before. Even better, the good times are expected to continue for Fossil. Management expects first-quarter and full-year 2013 sales growth of 10%, and full-year diluted earnings per share are expected to be in a range of $5.85 to $6.15.

Fossil has a great balance sheet, with a long term debt-to-equity ratio of just 6% and more than twice as much cash and equivalents as long-term debt. In addition, the company’s return on equity was 27% last year, indicative of how efficiently the company is managed. And yet, Fossil can’t earn more than a trailing P/E of 17 times, which matches the valuation on the S&P 500, despite the fact that Fossil’s growth trajectory is likely to be far better than the market’s.

Growth or value, it all sounds like opportunity to me

There’s a stark contrast between the two investing philosophies, and rarely any overlapping companies with qualities that appeal to both groups. Add in the fact that in today’s market, in which the Dow Jones Industrial Average recently broke new highs, and you’d likely be hard-pressed to find growth stocks with reasonable valuations.

However, each of these stocks has been felled by what appears to be little more than the market’s irrationality. These stocks are growing their revenues and profits at rates that far exceed the growth of the broader market, yet each of them carries a trailing price-to-earnings ratio about on par with the S&P 500. Investors with a Foolish eye for opportunities likely see the potential for market-trouncing returns going forward for each of these stocks, and if you consider yourself to be such an investor, you’d do yourself well to consider adding these names to your portfolio.


Robert Ciura has no position in any stocks mentioned. The Motley Fool recommends Baidu and Fossil. The Motley Fool owns shares of Baidu and Fossil. 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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