Use this screen to find companies that have produced strong growth despite the recession.
Although nearly all companies have been hit by the recession, some have weathered the storm better than others. A number of companies have been able to seize opportunities to expand by stealing market share from ailing competitors or by acquiring competitors at a discount. With all the attention being given to negative headlines, it's easy for investors to overlook the companies that are still producing strong results.
Since unemployment remains elevated and the housing market is as fragile as ever, the weak economy is likely to be around for some time. Looking for companies that have seen strong growth so far during the downturn can give us an idea of which stocks should hold their ground in case we see a double-dip recession. In the event that the economy does see a strong recovery, these stocks should emerge from the recession with a leg up on their competition. They were able to increase revenue while facing the strong headwinds from the economy, and most will perform even better when they no longer have to battle a weak economy.
This screen looks for stocks that have shown strong revenue growth through the recession but still trade at attractive valuations.
First, we focus on stocks that have shown substantial sales growth. We searched for companies that have produced average annual sales growth of more than 10% during the past three years. With this search, we will pick up companies that have increased their sales organically and ones that have grown through acquisitions.
Revenue Growth % 3 Year > 10%
While we're looking for companies that have seen strong growth, we also want to keep valuation in mind. We want to find stocks that our analysts think are trading at a discount to their intrinsic value, so we search for stocks that have a Morningstar Rating of 4 or 5 stars.
And Morningstar Rating > 4 stars
We also want a stock to carry a medium or low uncertainty rating. Morningstar analysts assign a stock an uncertainty rating based on the predictability of a company's sales and profits, strength of the company's balance sheet, and the risks associated with any other nonfinancial factors that could impact the value of the firm. Because of all the uncertainty surrounding the economy, we want to find companies that have fairly steady and predictable sales and operating profit, rather than firms that are susceptible to wild swings in sales or profits. We also want companies with solid balance sheets that will enable them to not only survive a prolonged weak economy but will also put them in position to take advantage of any opportunities for expansion or acquisitions that may arise.
And ( Fair Value Uncertainty = Medium
Or Fair Value Uncertainty = Low )
As of Aug. 30, this screen returned 51 names; here are a few that stand out because of the consistency of their revenue growth.
In addition to strong internal operating lines, Abbott has a successful record of acquisitions and partnerships. The recent acquisitions of Advanced Medical Optics and the drug units from Solvay and Piramal should add value over the long term. The strong record and ample cash flow raise our confidence that external growth opportunities will probably augment internal growth.
VCA Antech Inc
As the nation's largest operator of animal hospitals and veterinary diagnostic labs, VCA is poised to take advantage of the $43 billion market for pet products and services. Spending on pets has seen 8% compound annual growth since the mid-1990s, as pets have come to be thought of as valued family members. Animal health care (vet services and medicines) accounts for nearly half of the total spent on pets each year. Like health-care procedures for humans, pet health services and treatment options have expanded substantially in recent years as the result of research and technological advances. The crown jewel at VCA is the diagnostic lab business, one of the fastest-growing segments of animal health. The dominant player in this arena, VCA operates a nationwide network of 43 labs that serve more than 14,000 of the 22,000 animal hospitals in the United States. The company has lab services down to a science. An impressively large transportation fleet provides twice-a-day pickup service in metropolitan areas, and most hospitals can receive same-day results. Furthermore, these lab tests are generally very profitable for veterinarians as well as VCA, which is why we believe that vets will continue to order more diagnostic tests for pets. We find the hefty lab operating margins--north of 40%--extremely appealing.
David Krempa is a research analyst with Morningstar.