5 Bargain Growth Stocks

Growth is scarce at the moment. The average of America’s 500 largest companies saw its sales shrink 8% in its last reported quarter. Yet investors seem willing to pay high prices for shares. The S&P 500 trades at 16 times forecast 2009 earnings (a projection which assumes earnings will rise 12% this year). How that compares with the long history of stocks, we can’t say, since consensus estimates and forward price/earnings ratios weren’t always available, but the index has for more than a century traded at an average of less than 15 times trailing earnings. Forward price/earnings ratios should be lower than trailing ones.

I recently searched this full-price market with mostly sliding sales for companies that are cheap and growing. Few turned up. I started with 1,500 stocks: those in the large-company S&P 500 index along with smaller companies in the MidCap 400 and SmallCap 600 indexes. After looking for 10% increases in both sales and earnings in companies’ most recent quarters — by no means torrid growth — I was left with barely 130 stocks. Just over 50 of these had forward P/Es below 15. From these, I selecting five with strong balance sheets, listed below.

Advance Auto Parts (AAP) is benefiting from the misery of car makers, who in June sold 28% fewer cars than a year ago. Poor sales of new cars means more repairs on older ones, and Advance Auto is seeing brisk customer traffic and strong demand from garages in its more than 3,000 retail shops. Sales at longstanding stores surged 8.2% in the company’s most recent quarter, with commercial sales at those stores up 17.5%. Free cash flow swelled 34%. The stock’s dividend is a pitiful 0.6%, with less than 10% of profits paid out to stockholders, but management has spent aggressively to pay down debt. If the pace holds, the company might owe nothing by year’s end. Shares sell for 14 times earnings.

Home-health-care agencies have scrawny stock valuations at the moment. Investors fear a government health-care overhaul might lead to slashed Medicare and Medicaid reimbursement for visiting nurses. Almost Family (AFAM), a small but prosperous agency, is growing its sales and profits by greater than 20% apiece and has more cash than debt, yet its shares fetch just eight times forecast 2009 earnings. According to analysis by Jefferies & Company, an investment bank, a worst-case scenario would trim the company’s profit to $1.81 per share by 2011, while a more likely path would lead to a profit of $2.51 a share. That works out to either 13 or nine times earnings — a fair deal or an excellent one.

For thoughts on the remaining companies in the table below, have a look at some other SmartMoney stories. James B. Stewart recently made a case for investing in Buckle (BKE), a Nebraska-based seller of hip (which is to say, $80) jeans. Sales are expected to grow 15% this year and the company is debt-free with $4 a share in cash. I mentionedITT Educational Services (ESI) last month in a screen for companies producing “organic” sales growth — that is, higher sales from operations, not acquisitions. Schools are finding plenty of new customers among the jobless, and government loan programs are providing the financing. Finally, The J.M. Smucker Company (SJM) is growing at a pace that’s almost indecent for a peanut butter and jam specialist. Sales are forecast to rise more than 20% this year. I’ll focus on Smuckers and some of its pantry kin later this week with a look at why stock investors might want to cash in recent gains in banks and tech in favor of consumer staples.

Screen Survivors Company Ticker Industry Share
Price Price
Change
YTD
(%) Forward
P/E Sales
Growth
Last
Quarter
(%)
Advance Auto Parts AAP Car Parts Stores $42.24 25.53 14.18 10.32
Almost Family AFAM Home Health care 23.46 -47.84 8.57 77.30
ITT Educational Services ESI Schools 95.00 0.02 13.24 22.65
Buckle BKE Clothing Stores 30.35 39.09 11.37 24.58
The J.M. Smucker Company SJM Packaged Food 48.21 11.19 12.92 81.11