Are you looking for ways to increase your chances of achieving impressive returns over time? A way to do so is to screen for companies whose balance sheets are strong, earnings are projected to grow significantly and stocks are fairly priced.
In order to uncover companies that have the above characteristics, you first need to search for stocks whose share prices trade below or near the Peter Lynch earnings line.
Second, the capital structure is such that financial resources are employed in an efficient and effective manner. This is measured by return on invested capital exceeding the weighted average cost of capital.
Third, good businesses must have higher sales and profitability targets to hit over time. Wall Street analysts’ growth estimates indicate that the following stocks will see their earnings increase by an average yearly rate of 7% to 12% over the next six years. The expected growth is significant if we consider that the S&P 500 earnings are projected to rise 9% over the period in question.
General Dynamics
The first stock under consideration is the Falls Church, Virginia-based aerospace and defense company General Dynamics Corp. (GD, Financial). The stock ($186.74 as of Friday) trades approximately on par with the Peter Lynch earnings line, which indicates it is fairly priced.
The stock has a market capitalization of $54.08 billion with a 52-week price range of $160.21 to $193.76.
General Dynamics has a return on invested capital of 14.89% compared to the weighted average cost of capital of 8.58%. The company is earning excess returns.
Wall Street analysts forecast that the aerospace and defense company will grow its net earnings by 7.53% every year over the period from 2020 to 2025.
The stock has an overweight recommendation rating with an average price target of $209.61, reflecting 12.2% upside from Friday’s closing price.
Fresenius Medical
The second stock under consideration is the German global provider of dialysis care and other health care services, Fresenius Medical Care AG & Co. KGaA (FMS, Financial).
The share price ($39.46 at close on Friday) trades slightly above the Peter Lynch earnings line, suggesting that the stock is still reasonably priced.
The stock has a market capitalization of $23.71 billion and a 52-week price range of $31.63 to $42.75.
Fresenius Medical Care is producing an earnings surplus as its return on invested capital of 7.84% exceeds the weighted average cost of capital of 6.08%.
Wall Street analyst estimates show that the German medical care company should grow its earnings by 7.11% per year over the next five years.
Analysts have issued an overweight recommendation rating for this stock with an average price target of $44.71 per share, reflecting 13.3% upside from Friday’s closing price.
Celanese
The third stock under consideration is Celanese Corp. (CE, Financial), an Irving, Texas-based manufacturer and seller of high-performance engineered polymers in North America and internationally.
The share price ($108.59 at close on Friday) is just slightly above the Peter Lynch earnings line, indicating the stock is still reasonably priced.
The stock has a market capitalization of $12.98 billion and a 52-week price range of $94.56 to $128.88.
Celanese sees its business generating a 14.88% return on invested capital, which compared to the weighted average cost of capital of 7.88%, indicates that the company is earning excess returns.
Wall Street analysts estimate that the company will grow its net earnings by 11% every year over the period from 2020 to 2025.
The stock has an overweight recommendation rating and an average price target of $120 per share, which reflects 10.51% upside to hit within a year.
Disclosure: I have no positions in any securities mentioned.
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