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Growth Picks from a Master, Thomas Rowe Price

By Michael Carr   |   Friday, 05 Sep 2008 04:47 PM

Long before the Oracle of Omaha (aka Warren Buffett) dominated Wall Street, Forbes magazine marveled at the stock picking success of the "Sage of Baltimore," Thomas Rowe Price. He later would lend his name to the T. Rowe Price mutual fund family, which built on his success and manages more than $400 billion today.

Price started his first mutual fund in 1950 and provided investors with the best 10-year performance of that decade. His original shareholders saw gains of approximately 500 percent.

Among his biggest winners, Price bought Dow Chemical, Coca-Cola, Minnesota Mining (later 3M), and J.C. Penney during the Great Depression. By the time he sold 3M almost 50 years later, he realized a profit of more than 17,000 percent from his investment.

Buying for the long-term allowed Price to realize a 23,666 percent profit in Merck; more than 15,000 percent on Avon Products; 8,540 percent from Black & Decker; and almost 6,200 percent on Xerox.

Price was one of the first proponents of the growth-stock style of investing. He looked for stocks of well-managed companies in "fertile fields" whose earnings and dividends were growing faster than the overall economy.

For this week's screen, I quantified Price's growth investing criteria:

  • "Fertile fields" are fast growing industries or companies exploiting new technologies. Small-cap stocks were his favorites since they offered the greatest growth prospects. This is a timely guideline since, year-to-date, small cap stocks as measured by the Russell 2000 have been the best performers in the stock market.

  • Insiders must own at least 10 percent of the outstanding shares. This aligns their interest with shareholders.

  • Profit margins need to be improving over the past five years and be higher than the industry average. This should demonstrate that the company's management is among the best in the industry.

  • The earnings growth rate needs to be ranked in the top half of all stocks, indicating the company is growing faster than average.

  • The P/E ratio should be less than the five-year average ratio. The average P/E ratio for the last two years also needs to be less than 50. This helps us to avoid overpaying for growth.

    The nine stocks that passed the tests offer strong growth prospects for the long term:

    Administaff (ASF) provides small businesses with outsourced payroll, health benefits, and other services. The company has no debt, attractive fundamental valuations with a P/E ratio of 14, and a dividend yield of 1.9 percent at a recent price of 27.40. Analysts are forecasting an 11 percent increase in sales and 15 percent earnings growth for the next few years.

    AML Communications (AMLJ) markets a product called UltraSatNet, which is a satellite-based control system that improves utilization of the electric power grid. This technology will help utilities manage large load changes due to fluctuating demand and represents a significant growth opportunity. The recent price of 1.07 gives this highly speculative stock a P/E ratio of 4.

    Global Sources (GSOL) builds and hosts commercial Web sites for companies in China. Earnings growth of 25 percent for the past five years is expected to slow to a still better-than-average 20 percent a year for the next five years. Recent price: 10.67.

    Gulf Island Fabrication (GIFI) operates off-shore drilling platforms, mainly in the Gulf of Mexico. Recently trading near 43, GIFI is undervalued compared to its peers, trading at only one-third the industry price-to-sales ratio and at half the industry book value while delivering better-than-average growth.

    Hi-Shear Technology (HSR) makes rocket and satellite components for the military and NASA. Analysts are forecasting earnings growth of more than 30 percent for next year. At a recent price of 11.90, they see likely gains of 40 percent in the stock price over the next year.

    Jewett-Cameron Trading (JCTCF) manufactures and distributes specialty wood products and other household hardware items. The company has an 18 percent return on equity, the highest in its industry. At a recent price of 7.34, the P/E ratio is only six.

    National Technical Systems (NTSC) is a leading provider of outsourced technical engineering services. The company's largest shareholder is billionaire Jeffrey Gendell, manager of the $10 billion Tontine Partners hedge fund. This fund post returns in excess of 100 percent in both 2003 and 2005. NTSC recently traded at 5.

    Nevada Chemicals (NCEM) manufactures sodium cyanide, a chemical used in gold mining. At a recent price of 9.95, NCEM offers investors a 4 percent dividend yield.

    Pre-Paid Legal Services (PPD) sells memberships which allow clients access to legal advice. While earnings have grown at almost 20 percent a year for the past five years, the P/E ratio is only 10. Recent price: 44.64.

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    MichaelCarr
    Long before the Oracle of Omaha (aka Warren Buffett) dominated Wall Street, Forbes magazine marveled at the stock picking success of the "Sage of Baltimore," Thomas Rowe Price. He later would lend his name to the T. Rowe Price mutual fund family, which built on his success...
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