Value and growth are warring camps. That’s the traditional view in investing. But sometimes you can find both value and growth characteristic in the same stock.
And often, it pays. Beginning in 2001, I’ve written 11 columns on stocks displaying both value and growth characteristics. The average 12-month return on my recommendations in this series is 18.0%, compared to 10.3% for the Standard & Poor’s 500 Index.
Eight of my 11 columns on this subject have beaten the index, and ten out of 11 have shown a profit.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Last year’s column was profitable, but didn’t beat the index, rising 5.7% while the S&P 500 returned 17.0%. My only pick that distinguished itself was Skechers USA Inc., up 24.6%. The stinker was Taro Pharmaceutical Industries Ltd., down 18.1%
Jumping Hurdles
For purposes of this series, my definition of “value” is that a stock must sell for 15 times earnings or less. My definition of “growth” is that the stock must show average annual growth of 12% or better in both earnings and revenue during the past five years.
Of nearly 4,100 U.S.-traded stocks with a market value of $250 million or more,461 currently can jump my value hurdle. And 278 stocks meet the growth criterion. But only 40 stocks right now can jump both hurdles.
In this column, I will recommend five of them.
American Outdoor
American Outdoor Brands Corp. (AOBC, Financial) of Springfield, Massachusetts, was formerly called Smith & Wesson, and still gets about 85% of its revenue from that firearms subsidiary. It is diversifying into camping and outdoor equipment to avoid exclusive dependence on a single, controversial product line.
At this moment, I see no sign that the handgun or rifle market is saturated; nor does restrictive gun ownership legislation seem likely.
In the past four quarters, American Outdoor earned a sparkling return on equity, almost 36%. In the past five years, earnings have grown at an average pace of 38%. At nine times earnings, I think the stock is an excellent value.
There are ethical issues to be wrestled with here (just as there are with alcohol, gambling, or tobacco stocks). Investors must make their own decisions. But the numbers look handsome.
Argan
Barely covered by Wall Street analysts, Argan Inc. (AGX, Financial) builds electric power plants. Most are powered by natural gas, some by biodiesel and other forms of renewable energy.
Despite an enviable growth record, the stock sells for only 12 times earnings. I think investors worry that additional power plants will be unnecessary. I disagree. I think Americans will continue to demand more juice to power their computers, air conditioners and mobile devices.
I like obscure stocks and I like debt-free stocks. Argan is both.
D.R. Horton
I am sweet on the homebuilding industry. Following a harrowing decline in 2007-2009, it has come back about halfway to the glory days of 2004-2006. I think there is room for further gains.
That’s one reason I like D.R. Horton Inc. (DHI, Financial). Its revenue should hit $14 billion this year, up from $6 billion in 2013. Yet it’s not too pricey, at 14 times recent earnings.
Horton was on this list a year ago, and rose 15.5% in twelve months, a little less than the S&P 500. I see no reason not to go with it again.
Spectra Energy
Spectra Energy Partners LP (SEP, Financial), based in Houston, Texas, transports natural gas and oil, and operates natural-gas storage depots. It is structured as a master limited partnership (which can complicate your tax return).
The stock seems to me to be a fairly conservative play on recovery of the energy industry. The dividend looks lavish at 6.2%, but be aware there is some danger it could be cut.
TPG Specialty
TPG Specialty Lending Inc. (TSLX, Financial), based in San Francisco, is an affiliate of TPG Group Holdings, one of largest private-equity investors in the U.S. Its “specialty” is lending to middle-market firms, ones that the company says might not otherwise have access to capital.
The company just squeaked through on my eligibility criteria. I recommend it because I think the TPG organization has a deep talent pool, and will make sure there is an able hand on the rudder.
Disclosure: I own Argan and Taro Pharmaceutical shares for some of my clients.
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].
