In No-Growth Era, Screening For Growth Stocks

Qualcomm (QCOM) is the envy of many an S&P 500 C-Suite right now. Riding strong demand for mobile chips, Qualcomm just reported that revenue grew 24% in its most recent quarter. That’s a stark contrast to a recent S&P Capital IQ report that among the 170 S&P 500 companies that have released their quarterly financials, sales have declined by 0.6%. Remove the resurgent financial sector from the equation and the 500’s revenue drop broadens to 1.7% so far this earnings season. Heck, having one-tenth Qualcomm’s revenue growth would be a triumph for many S&P 500 companies.

A small sampling of the revenue challenged in the second quarter: Intel (INTC) reported a 2.5% decline, Coca-Cola (KO) booked a 3% revenue decline. At General Electric (GE) revenue fell 3.5%. Jim Chanos’ latest whipping boy short, Caterpillar (CAT), saw revenue fall 16% in the last quarter, as demand for mining equipment has cratered amid tepid global economic growth.

While ongoing cost-cutting continues to save the day, allowing profit margins to continue their levitation act, that’s a game that seems well into the 7th inning for this bull market. Exactly how much more in costs are there to cut at this point to generate profit growth?

Which brings to the quaint notion that it might be nice to look for companies whose goods and services are in demand. Revenue growth can take a whole lot of pressure off cost cutting as a profit driver going forward. For that you have to orient your financial research toward revenue growth. Yes, profit margins and earnings metrics are also important, but fire up YCharts Stock Screener and you can generate a good start point for further investigation.

Once you’ve selected S&P 500 under the “start with” drop down, shift your gaze over to the Add a Financial Metric button. Head to the Income Statement tab and choose Revenue at the top of the menu. That’s where you will find a wealth of 11 revenue metrics (nominal levels as well as per share data and growth rates) you can use to slice and dice.

To avoid one-off wonders for a quarter or year, checking the 3-year revenue growth leaders can be an interesting start point for further financial research. Leucadia National (LUK) and Express Scripts (ESRX) top the list.

Leucadia is a holding company with disparate businesses. Its outsize 152% revenue jump is -- not surprisingly -- a result of an acquisition not organic growth. Leucadia bought National Beef in late 2011. In 2012 that division delivered $7.5 billion in revenue; about 80% of Leucadia’s total haul.

Another complicating issue to consider is that Leucadia National’s long-time brain trust recently retired, but not before executing a neat succession move: It bought out the Jefferies investment banking firm—of which it was already a major stockholder-and essentially hired Jefferies brain trust to take over.

Too dicey? Maybe. But the managers of the value-oriented GoodHaven mutual fund ( up 30% over the past 12 months) have a long history of investing in Leucadia and are bullish on it. Though the GoodHaven managers have let the fund’s cash position rise to 33% rather than pay up in an increasingly pricey market, they are sticking with Leucadia, which accounts for 5.7% of the $500 million fund. From GoodHaven’s just-released shareholder letter: “Although there is uncertainty about the ability of Leucadia to continue its history of high shareholder return, we have great respect for the remaining Leucadia management as well as the Jefferies managers who have joined the team. With a stronger balance sheet and after a significant and expensive period of building broader capabilities, the Jefferies segment is poised to capture a larger share of investment banking industry revenue and profit. We continue to view Leucadia as an attractive holding.”

Non-organic growth is also at play in the 56% revenue rise for pharmacy benefit manager Express Scripts as it merged with Medco last year. Health Strategies Group estimates Express Scripts will have a 37% market share this year, well ahead of the 20% share for #2 CVS Caremark (CVS). While the Medco merger helped push revenue, as this chart shows, our dual national growth markets -- more medication demands from aging Boomers; and more cost oversight by health care providers, including employers and insurers -- was already pushing sales before that deal. (Express Script is a third-party manager/cost container for the pharmacy piece of health insurance plans.)

ESRX Chart

ESRX data by YCharts

Express Scripts’ dominant market share helps it earn a wide moat rating from Morningstar (Full Disclosure: Morningstar is an investor in YCharts). Right now the stock research firm estimates Express Scripts sells just 8% below its fair value. That’s better than the average wide moat stock which recently sold at a 1% premium to fair value. But it’s not near the 30% discount that would get a value investor salivating.

In terms of organic revenue growth, perhaps you’ve heard of Apple (AAPL)? Yes, the beleaguered stock is under a whole lot of profit and profit-margin pressure, but its 53.9% revenue growth over the past three years was devoid of any add-on deals. And sure, revenue has slowed; it grew only 8.63% over the past 12 months.

The S&P 500 is full of companies trading at forward PE ratios above 17 that can’t grow revenue more than a percentage point or two. Even a beaten up Apple grew revenue at 8% over the past year, and it trades at a rock-bottom 11 PE. The “narrow moat” stock --switching costs are low for fickle consumers tired of an iPhone-- currently trades more than 25% below Morningstar’s fair value estimate.

Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at editor@ycharts.com. You can also request a demonstration of YCharts Platinum.

Read more articles about: Investing Ideas  growth stocks   money managers   

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