One sign of a good stock is rapid revenue growth.
Sure, profits are what ultimately count. But you cant grow profits for long unless revenue is growing too.
Right now, some investors are chasing companies with fast revenue growth but scant earnings or none the likes of Uber Technologies Inc. (UBER, Financial) and Tesla Inc. (TSLA, Financial). Im not about to jump on that bandwagon.
I prefer companies with a history of profitability, and with a stock selling for a reasonable multiple of earnings.
Today I will highlight a few stocks that have shown revenue growth of 15% or more in the past four quarters, and 15% a year or more in the past five years.
Timely in my opinion is LGI Homes Inc. (LGIH, Financial), which aggressively goes after the low-priced end of the new-home market. The average selling price for its homes is about $240,000, versus about $400,000 for the typical builder.
Based in The Woodlands, Texas, LGI operates in 18 states mostly in the Southwest and the East.
Assuming that the coronavirus pandemic hangs on, buyers will favor suburban living over urban. But if the associated recession also hangs on, most buyers wont be able to afford big, expensive homes.
Conditions therefore seem to favor LGI, which already boasted a 31% annual revenue growth rate in the past five years. The stock sells for 14 times recent earnings.
Plastic appliances that straighten teeth are a popular alternative to old fashioned metal braces. A leading manufacturer is Align Technology Inc. (ALGN, Financial), with headquarters in San Jose, California.
Align has been one of the best-performing stocks of the past decade. A $1,000 investment 10 years ago would now be worth over $22,000 as of July 17. And the company has very little debt.
However, earnings will probably decline this year and possibly next year, as elective dentistry is postponed by the pandemic. The stock sells for only 13 times the past four quarters earnings, but 100 times the earnings that analysts expect for the next four quarters.
Revenue growth for the past five years has been at a 28% annual clip. If the company can grow half that fast in the next four years, I think its a good investment.
The company has a 12-year profit streak on the line. I dont expect it be escape unscathed from the consequences of the coronavirus recession, but I hope it can stay in the black.
The stock is followed by six analysts. Three of them call it a strong buy, the other three dont care for it. I like this sort of profile. When analysts unanimously like a stock, I have often found that to be a good sign.
Myr Group shares sell for 14 times earnings and 0.26 times sales.
I sold Progressive Corp. (PGR) earlier this year, and now I am suffering from sellers remorse.
I sold not because of any dissatisfaction with the stock, but to make room for more cash and medical stocks in clients portfolios.
Based in Mayfield Village, Ohio, Progressive is a property and casualty insurance company that has been gaining market share.
Progressive showed a profit in 14 of the 15 years through last year, and the 2018 and 2019 profits were handsome. I expect a fall-off, but I think most people will continue to regard homeowners insurance and car insurance as necessities.
I expect my rapid revenue growth picks to do well, but they havent done well in the past.
My picks in five previous columns on this subject have averaged only a 1.2% return in 12 months, compared with 10.9% for the Standard & Poors 500 Index. Last years picks particularly bombed, as a 61% loss in Diamondback Energy Inc. (FANG, Financial) led to a 9.5% loss overall.
Why do I mention this? Because, so far as I know, Im the only stock-market pundit who regularly reports the results of his past recommendations, whether those results are good or bad.
I figure that no one will believe the good results if those are the only ones I report.
Bear in mind that my column recommendations are theoretical and dont reflect actual trades, trading costs or taxes. Their results shouldnt be confused with the performance of portfolios I manage for clients. And past performance doesnt predict future results.
Disclosure: I have no positions in the stocks recommended today, personally or for clients. A hedge fund I manage is short Tesla.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].