- By Margaret Moran
With the S&P 500 up more than 6% year to date despite U.S. gross domestic declining more than 30% in the first half of 2020, many investors who missed the brief window of opportunity during the month-long market crash in March are finding it difficult to find good entry prices for their favorite stocks.
However, much of the index gains are from large-cap tech stocks, which have a higher weighting in the S&P 500. The Dow Jones Industrial Average, which weighs stocks based on share price, is actually down 6% year to date. In other words, there is still plenty of opportunity in more beaten-down sectors.
One way to find potential investment opportunities is to look for stocks with strong track records of growth, strong financial situations and good runways for growth. In order to find such stocks, I used the GuruFocus All-in-One Screener's new historical search feature to look for companies that met the following conditions every year over the past decade:
Maintained a financial strength rating of at least 5 out of 10.
Maintained a profitability rating of at least 5 out of 10.
Grew revenue, Ebitda and earnings per share without non-recurring items each at a three-year average annual growth rate of at least 5% (meaning that, over each three-year period, the stock needed to grow each metric by an average of 5% per year).
After screening for stocks that met the above criteria, I then identified the ones that were trading near or below their GF Value Line, an intrinsic value estimate from GuruFocus that considers a stock's valuation ratios, the company's past growth and analyst estimates of future business performance.
This search leaves us with three stocks as of Sept. 22: Ulta Beauty Inc. (NASDAQ:ULTA), Ross Stores Inc. (NASDAQ:ROST) and The Middleby Corp. (NASDAQ:MIDD).
Ulta Beauty is a beauty salon retailer headquartered in Illinois. It offers both prestige and mass-market cosmetics, makeup, fragrances, hair and skin care products, among others, through its brick-and-mortar stores and online.
On Sept. 22, shares of Ulta Beauty traded around $224.25 for a market cap of $12.63 billion and a price-earnings ratio of 45.84. According to the GF Value Line, it is modestly undervalued.
The company has a GuruFocus financial strength rating of 6 out of 10 and a profitability rating of 9 out of 10. The interest coverage ratio of 109.82 is higher than 85.13% of other companies in the retail industry, while the Altman Z-Score of 4.06 means it is not in danger of bankruptcy. The three-year revenue growth rate is 18.1%, the three-year Ebitda growth rate is 14.4% and the three-year EPS without NRI growth rate is 23.1%.
Analysts surveyed by Morningstar estimate that Ulta Beauty's revenue will drop through the end of the fiscal year before increasing to above 2019 levels by the time 2022 rolls around. The company has been investing strongly in its online business, and unlike many competitors, it is not being dragged down by excessive debt. Therefore, it is well-positioned to ride the eventual economic recovery while keeping its market-dominant position.
Ross is an American discount chain store company based in Dublin, California. It operates under the brand name "Ross Dress for Less." The company buys seasonal surplus items in bulk from fashion companies and is then able to offer them to its customers at discount prices.
On Sept. 22, shares of Ross Stores traded around $90.62 for a market cap of $32.24 billion and a price-earnings ratio of 60.38. According to the GF Value Line, it is fairly valued.
The company has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. The interest coverage ratio of 15.59 is higher than 64.34% of other companies in the retail industry, while the Altman Z-Score of 4.08 means it is not in danger of bankruptcy. The three-year revenue growth rate is 10.9%, the three-year Ebitda growth rate is 9.4% and the three-year EPS without NRI growth rate is 17.6%.
Analysts surveyed by Morningstar estimate that Ross' revenue will decrease very slightly through the end of the fiscal year before increasing to more than 30% above 2019 levels by the beginning of 2022. The largest discount apparel and home fashion retail chain in the U.S., Ross saw some benefit from pent-up demand when its stores began reopening in the second quarter, though this was mitigated by low stock as stores saw more demand than originally expected. Unexpectedly high pent-up demand is a good sign for the company, and lower GDP may also give Ross a short-term boost as more people search for bargains.
Middleby provides high-end equipment and solutions for industrial and residential kitchens. Its products include commercial food processing equipment such as donut conveyor belts, large ovens and espresso makers, as well as industrial kitchen appliances and premium residential kitchen products.
On Sept. 22, shares of Middleby traded around $90.98 for a market cap of $5.04 billion and a price-earnings ratio of 17.6. According to the GF Value Line, it is modestly undervalued.
The company has a GuruFocus financial strength rating of 5 out of 10 and a profitability rating of 9 out of 10. While the cash-debt ratio of 0.27 is lower than the median of 0.98 for the industrial products industry, the Altman Z-Score of 2.05 suggests it is not at high risk of bankruptcy. The three-year revenue growth rate is 10.2%, the three-year Ebitda growth rate is 9.7% and the three-year EPS without NRI growth rate is 8.3%.
Analysts surveyed by Morningstar estimate that Middleby's revenue will drop through the end of 2020 before recovering to the same levels as 2019 by the end of 2021. As most of its revenue comes from the sales of industrial kitchen products to restaurants, it's no surprise that the stock tanked 50% in March and remains low today. However, it is important to note that Middleby is a company built on acquisitions, so its long-term outlook may not be as good as it seems at first glance. Organic versus acquisition-based growth is always essential to analyze when looking at companies with high growth rates.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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This article first appeared on GuruFocus.