Growth candidates?
There are times when it is worth looking at those shares that fall short of the growth screen due to relative strength, but pass on all the other criteria. This may produce companies that:
- Have fallen off the radar screens of investors and analysts for any number of reasons.
- Are recovering from a short-term set-back, but the market has yet to fully recognise this.
- Have taken a share price hit due to sector worries that may not affect all companies.
- Have lost a key executive.
- Have a SP overreaction to an announcement - contract delays, product delays etc.
Relative strength is the only part of the growth screen that you should apply any flexibility to when using it. To recap we are looking for companies that exhibit the following criteria:
- An EPS 3 year CAGR of 10% or greater
- An EPS 1 Yr rolling growth rate of 15% or greater
- A maximum 1 year rolling P/E ratio of 20
- A PEG of less than 1 (Slater version)
- An operating margin of at least 5%
- A return on equity (ROE) of at least 15%
- Gearing of 75% or less
- Interest cover of at least 4 times
Finally 1 year’s relative strength greater than 0
Cupid (CUP) - a provider of online dating services
Pan African Resources (PAF) - a South African gold mine
Anite (AIE) - handset and network testing systems for the wireless market
Premier Oil (PMO) - oil & gas explorer
Brightside (BRT) - insurance broking & financial services
Some brief comments on those companies:
Cupid Market Cap: £57.4m; 1 yr RS -71%
CUP has grown sales over the last 3 years by 110% pa, while their EPS over this period has been 103.5% pa making 9.63p (adj.) last year. The stock crashed from 114p to 49p in late March on allegations that the company produced fake profiles on its dating site. The company denies this and has instigated an internal audit and said it may take legal action. Later in the same month it parted company with one of its joint brokers after the stock suffered from large amounts of short-selling. The stock has since partially recovered to 69p and is on a 12 month rolling forward P/E of 3.7 with EPS growth this year to December expected to be 82% and next year 13%.
Pan African Resources Market Cap £269m; 1yr RS -17%
PAF has grown sales and EPS over the past 3 years by 24.1% pa and 47.9% pa respectively making 2.01p last year and is well known as a low cost producer, with a production cash cost per oz of approx. $750. In December PAF, a 100,000 oz pa gold producing mine, purchased Evander mine a 75,000 - 100,000 oz producer for approx. £114m. 50% of the price paid by a rights issue at 14p. By late January the SP had moved up to 21p as this acquisition was seen as transformational for the business, undertaken at a very good price. Two events in February caused a SP decline - on 27 February the CEO unexpectedly resigned and in early February gold started a major retrenchment in price from $1650 to just below $1400 today. The SP fell to below the rights issue price to 13.6p, but has since recovered a little to 14.75p where it currently trades on a 12 month rolling forward P/E of 4.6, with EPS growth this year to June expected to be 10% and next year 51% (with the full effects of owning Evander).
Anite Market Cap £385m; 1yr RS -14%
AIE has grown sales over the last 3 years by 10.8% pa, while their EPS over this period has been 26.8% pa making 5.26p (adj) last year. In early March they released an interim management statement stating that order intake was behind that of last year and that Q3 had started with the same trend, causing the SP to fall almost 30% to 113p over the next month. In early May they announced that Q4 was a strong end to the year, better than they were expecting and consequently they expect profits for the full year to be towards the top end of market expectations. The SP has risen to 128p, but still well below the 52 wk high of 163p. It currently trades on a 12 month rolling forward P/E of 14, with EPS growth this year to April '13 expected to be 49.5% and next year 17%.
Premier Oil Market Cap £2.02bn; 1yr RS -9%
PMO has grown sales over the last 3 years by 31.4% pa, while their EPS over this period has been 27.7% pa making 50c (adj) last year. The major event that seems to have affected the SP, is the softening of the crude oil price this year following the higher prices of last year. The other depression on the SP is the substantial capital outlays that are required in their exploration programmes, such that they have never produced any free cash flow in the last 4 years, with result that debt has increased to $2bn from net cash of $121m in 2008. CEO Lockett though does expect operating cash flow to increase to $2bn (2.5x 2012's level) by 2016 as the Catcher development in the North Sea begins production. They will though have higher exploration spend requirements, as they develop their interest in the Sea Lion prospect off the Falklands. The SP at 381p has been stuck below 400p for much of the past year and trades on a 12 month rolling forward P/E of 7.9, with EPS growth this year to December expected to be 42.5% and next year 11.5%.
Brightside Market Cap £110m; 1yr RS -2%
BRT has grown sales over the last 3 years by 27% pa, while their EPS over this period has been 22% pa making 2.56p last year. The only negatives appear to be the softening of motor vehicle premiums which will affect the commissions that a broker like Brightside will make, the statement that their declaration of a maiden dividend required approval from their banks and that they are only followed by one analyst (although that could create an opportunity for value). The SP at 24.5p represents a 12 month rolling forward P/E of 7.2, with EPS growth this year to December expected to be 27.6% and next year 6%.
With the exception of CUP (which appears to be in danger of losing client trust), all of the above are companies with reasonable track records providing good returns that probably are worthy of further analysis to see whether there is an opportunity for good value. I have a holding in AIE and PAF in my growth portfolio.
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