If you want to enhance your chances to achieve impressive returns over time, looking for reasonably priced stocks of companies that have strong balance sheets and are expected to grow their earnings significantly is a good start.
To find such companies, I looked for stocks trading below or nearby the Peter Lynch earnings line with capital that is structured in a way that allows the efficient and effective employment of financial resources (as measured by return on invested capital (aka ROIC) that exceeds the weighted average cost of capital (aka WACC)).
A good business must also accomplish targets of higher sales and profitability over time. According to Wall Street analysts’ growth estimates, these stocks are expected to increase their earnings at least as much as the S&P 500.
Newmont Corp.
The first stock to consider is the North American gold producer Newmont Corp. (NEM, Financial). The share price ($44.56 as of Monday) trades only slightly above the Peter Lynch earnings line, indicating that the stock is not expensive.
The stock has a market capitalization of $36.53 billion with a 52-week price range of $29.77 to $45.36.
Newmont Corporation has a return on invested capital of 5.4% versus the weighted average cost of capital of 0.58%. The gold mining company is producing earnings surplus.
Wall Street analysts forecast that the miner will grow net earnings by 23.2% every year over the period from 2020 to 2025, while the S&P 500 is projected to grow by about 9%. The stock has an overweight recommendation rating with an average price target of $48.27.
Shoe Carnival
The second stock to consider is Shoe Carnival Inc. (SCVL, Financial), an Evansville, Indiana-based footwear retailer.
The share price of $37.37 at close on Friday seems fair as it is below the Peter Lynch earnings line.
The stock has a market capitalization of $530.4 million and a 52-week price range of $21.47 to $40.
Amid relevant metrics of financial strength, the return on invested capital of 9.81% surpasses the weighted average cost of capital of 7.85%. The company is earning excess returns.
Wall Street analysts estimate Shoe Carnival’s net earnings will grow 10% per year over the next five years, beating the 9% growth projected for the S&P 500. Analysts have issued a buy recommendation rating for this stock with an average price target of $45.50 per share.
Cabot Oil & Gas
The third stock to consider is Cabot Oil & Gas Corp. (COG, Financial), a Houston-based independent oil and gas explorer, producer and marketer in the United States.
The stock is fairly priced at $14.42 at close on Monday, which is significantly below the Peter Lynch earnings line.
The market capitalization is $5.88 billion, and the 52-week price range is $14.08 to $27.65.
As a sign of financial strength, Cabot generates a 25.8% return on invested capital, which is much higher than the weighted average cost of capital of 2.95%.
Wall Street analysts estimate that the company will grow its net earnings by 21.2% per year over the period from 2020 to 2025, versus an expected 9% rise in net earnings of the S&P 500. The stock has an overweight recommendation rating and an average price target of $19.90 per share.
Disclosure: I have no positions in any security mentioned.
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