5 Sane Growth Stocks: Screened To Minimize Risk

Now that last year’s stock picks for “Sane Growth” have clocked tidy investment returns, YCharts is looking for a new crop of growth companies for cautious investors. So once again, we set the YCharts Stock Screener to both find growth stocks and to weed out those with a few particularly risky characteristics common to the genre. The repeat experiment – tweaked a bit to include more sophisticated investment research tools now available – leads us to consider a diverse group of five companies for growth investments.

(You can read the original article on 2012’s Sane Growth Stocks and last week's article on how the 2012 stock picks performed, with more information on the stock screening strategy.)

DG Chart

DG data by YCharts

Dollar General (DG), AmerisourceBergen (ABC), Clean Harbors (CLH), Eastman Chemical (EMN) and WellCare Health Plans (WCG) were among 39 companies that popped up in our screen for conservative growth. Here’s how we found them:

We set the YCharts Stock Screener to find growth by listing companies that had year-over-year revenue growth and retained earnings growth of at least 10% each. Then we added a few parameters intended to take down the risk a notch.

We asked the screener to take out companies with market caps less than $2.5 billion and YCharts Pro Fundamental Scores under 7. Because high valuations often make growth stocks vulnerable to hard falls, we set two limits on share price valuations; a forward price to sales ratio no greater than 1.5, and an historic enterprise value to EBITDA below 15. We also asked the Screener to kick out the numerous China-based companies that showed up in the screen, simply because we were not interested in analyzing China’s unique issues here.

The screen closely resembles one we ran last fall to find seven stocks for conservative investors; a group whose share prices have since grown some 15% to 31%. We added the enterprise value and forward valuations for the latest screen, but there are hundreds of metrics available for customizing this exercise further. Limits on price to earnings or earnings growth ratios, short interest and debt ratios can be added or substituted, for example, or minimums for things like cash flow coverage.

We honed in on the five companies above after a little research into their operating situations. Dollar General is opening 650 stores this fiscal year and still adds sales in existing stores at impressive rates. Prescription drug distributor AmerisourceBergen recently won a $400 billion contract with drug store chain Walgreens (WAG) that should boost its sales for another decade. Hazardous waste removal company Clean Harbors has had 20% annual revenue growth for many years now, and business tends to get better when manufacturing picks up. Eastman Chemicals has several market-leading products, and it recently made a major acquisition that’s expected to push big, steady profit increases. WellCare, a health insurer that specializes in Medicaid, should grow as the Medicaid program expands to cover more people. We’ll take a look at each of these companies here and in future columns.


Discount retailer Dollar General continues to perform well even as competitors complain of slow consumer spending. Dollar General’s earnings usually beat forecasts, and its same store sales have marched up every quarter for two years. Comparable store sales growth at 5.1% last quarter was much better than major competitors in the space, including Dollar Tree (DLTR), Family Dollar (FDO), Target (TGT) and Wal-Mart Stores (WMT). Its operating margins look healthier than many of those of competitors too.

DG Operating Margin TTM Chart

DG Operating Margin TTM data by YCharts

While Dollar General is no small operation, it has been growing like one. The number of stores is up to 11,000, and earnings have increased 10-fold in the past five years. The stores added tobacco products last year and discovered that most smokers buy lots of other items when they come in for cigarettes. There has been some speculation also that Dollar General could make a play for Family Dollar, its most weakened competitor.

The biggest threat to Dollar General’s growth would be stiff competition in its own backyard, perhaps from Wal-Mart’s Neighborhood Stores, or the slightly higher end Dollar Tree. But forecasts for the company call for about 10% revenue growth this year and next, with at least as much profit growth both years. With its share price valuations still reasonable, it looks like a sane way to grow.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.



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