By Philip van Doorn, MarketWatch
Should you favor value stocks or growth stocks?
It’s an old argument.
If you’re adept at picking long-term winners — and most investors are not — there’s no question that growth stocks are better. But if you want to buy stocks that are on sale or lower the volatility risk of your portfolio, value stocks can still make you a lot of money.
We have identified 20 rapidly growing companies that have also become more profitable. And the surprise is that they can reasonably be considered growth stocks.
MarketWatch’s Mark Hulbert pointed out that value stocks are cheaper relative to growth stocks than they have ever been, except for the internet bubble of 2000.
To start, what is a value stock? It’s generally considered to be one that trades low relative to book value. John Buckingham, the editor of the Prudent Speculator newsletter (which recently had a No. 1 ranking for performance since its inception 40 years ago from the Hulbert Financial Digest), simply divides all stocks in half. The cheaper half, based on price-to-book ratios, are deemed value stocks.
So we decided to take the same approach with the S&P Composite 1500 Index, which is made up of the large-cap S&P 500
, the S&P 400 Mid-Cap Index
and the S&P Small-Cap 600 Index
. FactSet had price-to-book ratios (based on closing stock prices on Sept. 11 and average book values for the past 12 reported months) for 1,461 stocks.
Our value group is made up of the 730 stocks in the lower half, determined by price-to-book ratio. Here are the 20 companies in the value group that have increased sales per share the most over the past 12 months from the previous 12-month period, while also improving gross profit margins:
|Company||Ticker||Industry||Price-to-book ratio||Sales per share - past 12 months||Sales per share - year-earlier 12-month period||Increase in sales per share||Gross margin - past 12 months||Gross margin - year-earlier 12-month period|
|Molson Coors Brewing Co. Class B||(NYS:TAP)||Beverages: Alcoholic||1.6||$40.58||$17.80||128%||39.15%||38.51%|
|Anadarko Petroleum Corp.||Oil and Gas Production||2.0||$22.90||$15.50||48%||26.08%||-8.27%|
|E*Trade Financial Corp.||(NAS:ETFC)||Investment Banks/ Brokers||1.8||$8.03||$5.47||47%||89.17%||83.14%|
|EQT Corp.||(NYS:EQT)||Oil and Gas Production||1.7||$14.10||$10.00||41%||30.44%||7.19%|
|Micron Technology Inc.||(NAS:MU)||Semiconductors||2.3||$15.48||$11.92||30%||33.92%||22.66%|
|Range Resources Corp.||(NYS:RRC)||Oil and Gas Production||0.7||$8.78||$6.43||37%||19.32%||-21.55%|
|Pioneer Natural Resources Co.||(NYS:PXD)||Oil and Gas Production||2.1||$28.75||$21.35||35%||16.31%||-8.23%|
|Virtus Investment Partners Inc.||(NAS:VRTS)||Investment Managers||1.7||$48.04||$37.35||29%||79.17%||73.93%|
|Newell Brands Inc.||(NAS:NWL)||Industrial Comglomerates||1.7||$31.71||$24.91||27%||34.79%||33.79%|
|PDC Energy Inc.||(NAS:PDCE)||Oil and Gas Production||1.0||$12.08||$9.60||26%||12.04%||-22.16%|
|Quanta Services Inc.||(NYS:PWR)||Engineering and Construction||1.6||$54.87||$43.89||25%||13.49%||11.30%|
|Corning Inc.||(NYS:GLW)||Electronic Components||1.7||$9.54||$7.64||25%||39.90%||38.34%|
|Legg Mason Inc.||(NYS:LM)||Investment Managers||0.9||$29.94||$24.49||22%||82.21%||79.64%|
|Concho Resources Inc.||(NYS:CXO)||Oil and Gas Production||1.9||$14.77||$12.14||22%||21.59%||-19.63%|
|SLM Corp.||(NAS:SLM)||Finance/ Rental/ Leasing||2.3||$2.98||$2.46||21%||69.54%||69.08%|
|Noble Energy Inc.||(NAS:NBL)||Oil and Gas Production||1.3||$8.77||$7.28||20%||-6.07%||-36.25%|
|Western Digital Corp.||(NAS:WDC)||Computer Peripherals||2.2||$64.80||$53.98||20%||31.65%||27.09%|
|Leucadia National Corp.||Investment Banking/ Meat Processing||0.8||$32.83||$27.50||19%||18.80%||3.50%|
|Sanderson Farms Inc.||(NAS:SAFM)||Food: Meat/ Fish/ Dairy||2.4||$143.02||$121.31||18%||19.57%||13.94%|
You can click on the tickers for more information, including news, financial reports, charts and other ratios.
We focused on sales per share, rather than raw revenue figures, because the per-share numbers reflect any dilution caused by the issuance of shares (to pay for acquisitions, for example), or declines in share counts resulting from stock buybacks. Molson Coors Brewing Co. (NYS:TAP) , for example, issued new shares to help pay for its acquisition in October of the 58% of MillerCoors it didn’t already own.
We then narrowed the list to companies with expanding gross margins. This might exclude companies that have been juicing sales through heavy discounting, or it may simply mean business conditions improved, as they have for oil producers. A company’s gross margin is its sales, less the cost of goods or services sold, divided by sales.
The presence of so many oil producers shows the limitation of this screening method. Yes, those companies have had very large increases in sales, but that has been in line with the recovery of oil prices from their low point in early 2016. You need to think about whether the increase in sales reflects something other than innovative products or skillful management.
If you see any companies of interest here, the next step is to do your own research and consider whether the companies are likely to continue to increase their sales rapidly, without letting their gross margins slip.