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May 8, 2018

CNBC 6 Growth Stocks Ready for Outsized Gains | May 8, 2018.

6 Growth Stocks Ready for Outsized Gains

Mark Kolakowski

Lawrence Kemp cites Warren Buffett as an "inspiration," but is not a value investor. Instead, the manager of the BlackRock Mid-Cap Growth Equity Fund (BMGAX) is not shy about paying up for stocks that have strong growth prospects, as reflected in that fund's recent price-earnings (P/E) ratio of 28 times, versus 23 times earnings for the Russell Midcap Growth Index, Barron's reports. "Stocks in the fund are a little more expensive than average, but we think the companies will grow into their valuations," he told Barron's. Among his favorites right now are Global Payments Inc. (GPN), Lamb Weston Holdings Inc. (LW), Vulcan Materials Co. (VMC), Vail Resorts Inc. (MTN), CoStar Group Inc. (CSGP) and Inc. (STMP).

Record of Outperformance

The BlackRock Mid-Cap Growth Equity Fund has delivered an average annualized total return of 16.61% over the past five years, 3.75 percentage points more than the S&P 500 Index (SPX) and better than 99% of the 472 funds in its peer group, according to Morningstar Inc. Its largest holding is CoStar Group, at 2.66% of the fund's value as of March 31, per Morningstar. Barron's notes that the fund holds 66 stocks in total, with the top five also including Bright Horizons Family Solutions (BFAM), SBA Communications Corp. (SBAC), InterActive Corp. (IAC) and Netflix Inc. (NFLX).

Statistical Summary

For the first group of stocks mentioned above, here are their 52-week price moves and forward P/E ratios based on the consensus estimates for full year 2018 earnings, per Barron's:
  • Global Payments: +30%, 22x
  • Lamb Weston: +59%, 22x
  • Vulcan Materials: -2%, 28x
  • Vail Resorts: +14%, 25x
  • CoStar Group: +53%, 51x
  • 126%, 24x
By comparison, the S&P 500 is up by 11.6% over the past year.

Three Growth Categories

Kemp puts his stock selections into three categories, per Barron's. "Durable growth" companies make up about half his portfolio, and are industry leaders that should continue to expand for years to come. "Superior growth" companies, such as "category killer" Netflix, are about 43% of his holdings. The rest of his holdings are cyclical stocks that he buys at low points in the business cycle, when their prices are down.

Durable Growers

Lamb Weston and Vail Resorts are in this category. Lamb Weston, a spinoff from Conagra Brands Inc. (CAG), is the largest producer of frozen French fries in the U.S. and the number two maker globally. Demand is growing worldwide, and Lamb is expanding to meet it, while enjoying "good pricing power" as Kemp tells Barron's.
Vail owns several leading ski resorts in the U.S. and Canada, continues to grow through acquisitions, and is able to raise ticket prices by 3% to 4% annually, he says. Vail has been cited by T. Rowe Price Inc. (TROW) investment manager Henry Ellenbogen for "world-class database-marketing" and other attractive fundamentals. (For more, see also: 5 Gurus' Stock Picks for a Pricey Equities Market.)

Pumping Out

Vulcan is a leading supplier of crushed stone, gravel and sand for construction. Kemp expects a 10% improvement in output this year, after 2017 production was held back by flooded quarries. High fixed costs means that incremental sales revenues pretty much fall directly to the bottom line, he adds.

Tech Picks

CoStar is the leading provider of data on commercial real estate, is expanding through acquisitions, and is increasing the price of subscriptions by offering more data and services, Kemp says. Co-Star has been called "an incredibly cool company" and "the Bloomberg of the real estate market" by Edwin "Tim" Johnston of Sandhill Investment Management. (For more, see also: 10 Growth Stocks for Long-Term Investors.)
Global Payments processes card payments for small and midsize merchants, offering value-added services that allow it to charge more than bigger rivals such as Visa Inc. (V). Consensus estimates call for a 26% profit increase this year, Barron's indicates. Johnston of Sandhill also is a big fan of the company, which he says has an exceptionally smart CEO. has branched out from being merely an online seller of stamps to a leading provider of services such as the management of orders and returns. Growth is being fueled by having big online retailers such as Inc. (AMZN) and eBay Inc. (EBAY) as clients, Kemp adds.