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Ron Baron's Bargain Growth Stocks

By    |   Tuesday, 28 October 2008 12:55 PM

While the Forbes 400 includes several value investors, few growth strategists have made the cut.

Ron Baron is one of them. He manages $19 billion in mutual fund assets through his Baron Capital. With a personal worth of $1.4 billion, Baron is number 355 on the Forbes list of richest Americans.

Baron has personally managed the flagship Baron Growth Fund since 1994. Over the past 14 years, the fund has provided shareholders with an average annual return of 14.2 percent, significantly outpacing the S&P 500, which returned only 8.9 percent a year over that timeframe.

Baron’s style is to invest in small growth companies and to invest for the long-term. His average holding period is more than five years.

He invests in growth companies using a value-oriented approach. His buy candidates include stocks that can double earnings over the next three to five years (the growth factor) without employing excessive leverage.

"The use of leverage is the principal reason small businesses go out of business. Read the papers," Baron recently told Forbes magazine.

This week's superstar stock screen builds on these simple principles, culled from Ron Baron’s playbook:

• Small cap stocks were defined as those with a market capitalization less than $250 million. This level includes almost two-thirds of listed equities.

• A minimum price of $5 a share should eliminate speculative penny stocks. It also will eliminate some beaten-down gems. Many investors may not realize that more than half of all stocks listed on the exchanges trade lower than $5, due to the recent market turmoil.

• Positive earnings in the most recent quarter; year-over-year earnings growth in that quarter; and an estimated earnings growth rate in the top half of all stocks. These screens find us companies that are growing faster than the economy.

• Finally, a debt-to-equity ratio below 25 percent identifies companies that are growing those earnings without using excessive leverage.

I found 10 growth stocks for this week's screen:

BIDZ.com (BIDZ) sells jewelry online, using a live auction format. Sales growth has averaged 40 percent a year for the past five years but is expected to slow to 30 percent this year. Earnings per share growth averaged 33 percent a year over that time span. With a projected earnings growth rate of 40 percent for this year, BIDZ seems undervalued at a recent price of 5.62 and a P/E ratio of 8.

CEVA (CEVA) licenses silicon intellectual property used in Bluetooth handsets and other consumer electronics devices. Value investors Royce & Associates owns more than 12 percent of this company, which some analysts think can nearly double over the next year from its current price near 6.58.

Citi Trends (CTRN) operates more than 300 stores specializing in urban fashion apparel and accessories for the entire family. The stores are designed to appeal to low- to moderate-income customers. Despite above-average revenue and earnings growth, CTRN has an industry average P/E ratio of 11 at the recent price of 12.23.

Computer Task Group (CTGX) provides IT staffing solutions for large projects throughout North America and Europe. The company is a leader in delivering IT solutions in the healthcare industry, including an application designed to help insurers spot fraud, waste, and abuse. Recently trading at 5.11.

Cynosure (CYNO) is an aesthetic device maker, selling systems to physicians and other practitioners to perform non-invasive cosmetic procedures. The stock has been beaten down by concerns that consumers will cut back on discretionary spending, but at a recent price of 11.90 CYNO is trading at six times next year's projected earnings. An economic slowdown seems to have been adequately discounted, if not over-discounted, by the market.

Dynamex (DDMX) provides same-day delivery and logistics services in the United States and Canada. Management expects year-over-year sales growth of 7 percent to 8 percent and net income to be $1.50 to $1.60 per share, giving the stock a P/E ratio of 12 at the recent price of 19.11. The well-managed company has profit margins and return-on-equity that are twice those of competitors.

Matrixx Initiatives (MTXX) develops, produces, markets, and sells over-the-counter (OTC) healthcare products, most notably Zicam. The popular cold remedy has helped the company grow earnings by an average of 30 percent a year for the past five years. At a recent price of 15.66 and a P/E ratio of 14, the market seems to be undervaluing this stock.

RRsat (RRST) provides broadcast services to more than 425 television and radio channels, covering more than 150 countries. The company was recently priced at 8.43, offering investors a 3.9 percent dividend yield in a fast-growing industry.

Shoe Carnival (SCVL) operates nearly 300 discount shoe stores. The stock was recently trading at 10.31, near its 52-week low. In a tough economy, retailers can suffer, but this discounter is well-positioned with no debt and slow but steady earnings growth.

Synovis Life Technologies (SYNO) is a diversified medical device maker. Among its biggest sellers is Peri-Strips Dry, which is used in bariatric procedures to treat obesity. Sales for this product are growing at 37 percent a year. With obesity becoming a national health concern, this product should continue to sell well. Recent price: 15.16.

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While the Forbes 400 includes several value investors, few growth strategists have made the cut.Ron Baron is one of them. He manages $19 billion in mutual fund assets through his Baron Capital. With a personal worth of $1.4 billion, Baron is number 355 on the Forbes list of...
Tuesday, 28 October 2008 12:55 PM
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