Tuesday October 23, 2012
by Stephen Quickel, editor US Investment Report
Yes, a flurry of unexpectedly poor earnings releases in the coming weeks could dim my optimism. And yes, too, we have the so-called “fiscal cliff” and the presidential election.
Yet the basic strength of the US economy remains solidly in place, both in the corporate sphere and along Main Street, where more folks are going back to work, buying cars and homes, and cleaning up credit card debt.
As for common stocks, strong earnings growth in a rebounding economy is crucial. Earnings growth drives stock prices more than any other force. There is also room for optimism about price valuations.
According to Bloomberg, today’s Dow trades at a current P/E ratio of just 12.6 and a forward P/E of 11.6. That compares with 17.7 and 16.1 when the Dow topped out in October 2007, five years ago.
What’s our plan? We are going to compromise: We are going to name the stocks we have targeted for purchase, but we are going to buy them only in very small initial amounts—with intent to raise those limited positions as the stocks and/or the market gain upside traction.
If the market falters further—and it could weaken with the fiscal cliff and election looming, not to mention a raft of third-quarter earnings reports due in the coming weeks—we will retain the new positions that are doing well and, with the help of tight stops, weed out the weak ones.
We are adding or restoring nine stocks to the our recommended list. Their average EPS growth is 18.8%.
Bally Technology (BYI): With casino traffic and sales of its gaming devices rising toward $1 billion, Las Vegas-based Bally is rated a Strong Buy by 10 of 14 analysts who are betting on 19.5% a year earnings gains and a possible P/E upgrade from 13.
Blucor (BCOR): Formerly known as InfoSpace, this tiny Bellevue, Washington, provider of search and tax preparation software has reported huge earnings gains in recent quarters, is expected to grow earnings 20% a year, and trades at a 16.6 P/E and 0.83 PEG.
International Business Machines (IBM): For conservative growth, and sound sleep at night, we suggest the new, improved version of aged Big Blue with an average but safe 11% a year estimated earnings growth.
IPG Photonics (IPGP): A specialist in laser products, this up- and-coming Massachusetts company has poked above its 10-week moving average at 58 and seems headed for 70. Eight of eleven analysts rate it a Strong Buy that can grow earnings 25% a year.
Ixia (XXIA): Unusually-named little Ixia of Calabasas, California, has attracted five Street analysts who think it can lift earnings 22% a year and rate it a Strong Buy. It supplies network and applications performance testing products to high tech customers.
Novo-Nordisk (NVO): A Danish drug giant noted for diabetes products, NVO has been on-and-off our Recommended List for years. Now on a steady climb since the June US market low, it is expected grow earnings 18% going forward.
Select Comfort (SCSS): This Minneapolis mattress company with 380 stores in the US and Canada has done well for us in the past. With earnings growing at 22% a year, we see SCSS, resting lately around 32 after its summer rise, rebounding to 40.
Thor Industries (THO): An Ohio-based maker of recreational vehicles, buses and ambulances, THO has risen from 27 to 37 since August with earnings slated to rise 26% this year and 17% in 2013. Our price target is 45, and more like 50 if its 11 P/E is upgraded.
Transdigm Group (TDG): Stopped from our portfolio in late July, this Cleveland aircraft components maker is back on the rise, at 145 nearing its previous high of 150 and headed for 160 in our opinion. Its rapid acquisitions and debt adds some risk, but analysts look for 22% a year earnings growth giving it a 0.75 PEG.
Learn more about this financial newsletter at Stephen Quickel's US Investment Report.