Most investors like rapid growth. But those of us who have been around the block a few times don’t want to pay too much for it.
Last weekend, using screening software from TD Ameritrade Institutional and some other tools, I combed through some 3,900 stocks, looking for companies that have doubled their revenues in the past three years.
Only 83 U.S.-traded companies could make that boast – roughly 2% of all companies. They included such trendy names as Twitter Inc. (TWTR) and Tesla Motors Inc. (TSLA). But I wouldn’t touch either of those two stocks with a barge pole. Twitter, which has yet to show a profit, sells for 53 times the earnings that analysts hope to see next year. Tesla, which is in the same boat, sells for 81 times next year’s estimate.
As a value investor, I almost never pay more than 15 times earnings for a stock. So I looked for stocks with rapid revenue growth that sold at or below my value threshold. I found seven. Not a single one is a household name.
Enstar Group
Enstar Group Ltd. (ESGR, Financial) of Hamilton, Bermuda, takes over business from insurance and reinsurance companies that have stopped issuing new policies. That sounds like a risky undertaking, and potentially it is. However, Enstar has shown at least 15 consecutive annual profits. The stock is barely followed on Wall Street. Only two analysts have published their opinion on the stock lately. Both rate it a strong buy.
Gramercy Property
Based in New York City, Gramercy Property Trust Inc. (GPT, Financial) owns more than 150 office and industrial properties (in whole or in part) in Los Angeles, Dallas, Chicago and several other cities. Bank of America is the tenant in close to a quarter of its properties. While the stock price is less than 15 times earnings according to TD Ameritrade Institutional, other sources peg it a bit higher.
Hi-Crush Partners
Riding the boom in hydraulic fracturing (fracking) was fun for several years for Hi-Crush Partners LP (HCLP, Financial) of Houston, Texas. The company, a master limited partnership, supplies monocrystalline sand to fracking companies that use it to help blast more oil out of deposits. Today, with oil prices half of what they were a year ago, the company is going through rough times. The stock price, which hit $69 less than a year ago, is down to about $22. At that price the stock sells for only 7 times earnings, which may make it worthwhile to ride out the continuing problems I anticipate for the industry over the next year or two.
King Digital
King Digital Entertainment plc (KING, Financial) has headquarters in Dublin, Ireland, but trades on the New York Stock Exchange. It makes video games bearing the names Candy Crush, Farm Heroes, Pet Rescue and Bubble Witch, and claims for than eight million unique visitors a month. The video game field is notoriously faddish. But that is why you can pick up shares of a fast-growing, highly profitable (at least for now) company for less than nine times earnings.
New York Mortgage
Perhaps the cheapest stock in this group is New York Mortgage Trust Inc. (NYMT, Financial), a Manhattan-based real estate investment trust that invests in mortgage-related securities. Everyone remembers what happened to the mortgage-investment field during the 2007-2009 financial crisis. Indeed, this company had four consecutive years of losses ending in 2008. However, it has now been profitable six years in a row.
Being in a severely out-of-favor industry the stock trades at only six times earnings and 1.1 times book value (corporate net worth per share).
Pacific Drilling
` Here we go with another energy stock. Energy is severely out of favor and I suspect will remain so for at least another six months, probably longer. Pacific Drilling SA (PACD, Financial) is an offshore drilling specialist based in Luxembourg. It has a substantial following on Wall Street and the analysts are sharply split: Nine buy ratings, seven neutral, and three sell.
Compared to most drillers, Pacific has a diversified customer base, which should help it weather the industry’s current storm. The company is buying back some of its own stock, which makes sense to me since the shares have dropped to about $2.39 from more than $11 during much of 2013.
Tortoise Energy
Tortoise Energy Infrastructure (TYG, Financial) is a publicly traded investment fund that invests primarily in energy partnerships, many of which are pipelines. Its shares, currently around $35, were flirting with $50 a year ago. I would not expect much good to come of these shares in the next six months, but for patient long-term investors I think they might work out well.
