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America's hottest growth stocks
Since the start of the year, the vital signs from the US have been looking increasingly strong, which provides grounds for hope that the world's biggest economy may now be capable of producing sustainable growth for some time to come. True, there are good reasons to temper enthusiasm, such as the ongoing problems in Europe and bubble fears in China, but the data from across the pond nevertheless looks impressive. With this in mind, we've decided to run one of the ultimate growth stock screens on the S&P 500 to see what it throws up.
The screen was devised by investment star Martin Zweig who initially rose to prominence when he predicted the Black Monday crash on a popular US television show shortly before the big event. His approach to investment is much about market timing. Indeed, his well-known growth screen, which was set out in his book Winning on Wall Street, is a stock selection tool he only recommends to use when conditions are right and not at other times. The screen is very rigorous in its full form and we've relaxed a few criteria to get any results at all! Unsurprisingly, from a sector perspective our stocks are fairly narrowly drawn. In fact, they are all focused on a classic growth area: technology.
This is what we have screened for:
■ A stock that is too cheap suggests problems, while one that is too expensive should be avoided. Therefore shares should have a PE ratio of more than five but less than 43.
■ Revenue growth is needed to power earnings growth and must represent at least 50 per cent of earnings growth over the past five years.
■ Gearing of less than 75 per cent.
■ Earnings must be positive in the last four quarters and average earnings growth must exceed the five-year average.
■ EPS must have risen in each of the last five years.
■ Average annual compound EPS growth over the past five years should be 15 per cent or more.
Cognizant Tech. Sol.
* Based on forecasts for financial year end ** Includes long-term investments of $67bn
Source: S&P CapitalIQ
There has been some uncertainty surrounding the prospects of computer giant Apple since the death of its founder, Steve Jobs, and an earnings miss last year. However, recent results suggest the group's gadgets have maintained their allure with consumers. Indeed, despite increasing competition from other tablet and smart phone manufacturers, one of Apple's main problems continues to be its ability to supply its product to the market fast enough. Meanwhile, upgrades to popular existing products are coming through and there is major excitement about the prospect of the launch of an Apple TV. The company has also recently moved to start to return some of its massive $100bn cash pile to shareholders with a $10bn annual dividend payout in the offing.
Given that about two-thirds of Accenture's business is done in Europe, one may think the technology outsourcing and consulting business would be feeling the pain of the eurozone crisis. However, recent second-quarter results revealed that trading was strong for its outsourcing business in the region. Trading was also impressive elsewhere. The group has adapted to the tougher economic environment by increasing its focus on cutting costs for clients. All in all, outsourcing revenue grew by 20 per cent. Life has been tougher for the consulting business, which accounts for just over half of revenues, and growth is expected to slow as the year goes on. Nevertheless, the overall outlook is bright given the strong progress in outsourcing and the company has said it expects to beat full-year forecasts based on second-quarter trading and the encouraging outlook.
Indian IT outsourcing firm Cognizant is an established growth star in the US. However, recently it has seen slowing growth in Europe as a result of the region's economic woes. About one-fifth of the group's work is in the region and a significant proportion of that business is discretionary spending, so the slowdown is not too much of a surprise. Strength elsewhere, means the group is sticking by guidance of 23 per cent revenue growth in 2012, though. The company could boost growth prospects by making use of its hefty $2.4bn cash pile to make larger acquisitions than it has in the past. The group is also pushing into fast-growing regions such as Latin America, and fast-growing technologies such as cloud computing.
It looks as though 2012 could prove a good year for cable provider Comcast. The company has long fought against the defection of TV customers to other providers, but in the fourth quarter substantially slowed video subscriber losses to just 17,000 compared with 135,000 a year before. The improvement has been put down to better customer service and product development. At the same time, the group continues to win broadband customers from rivals at an impressive rate, with 336,000 data subscribers added in the fourth quarter. Meanwhile, the recently acquired NBCUniversal business traded steadily and there are hopes of a boost in revenues as a result of advertising for the US presidential election and the Olympics. The group has also boosted its annual dividend payout by more than two-fifths and has earmarked $6.5bn for share buy-backs.
Intuit is a leading tax-filing software company and it is currently in its busiest month of the year as businesses and individuals use its TurboTax system to file their tax returns on time. The company is facing increased competition from rival software companies and traditional firms that are moving their offering online. However, recent updates from the group suggest it has continued to win market share this year. In addition, an apparent weakening in performance recently looks likely to have more to do with the performance in comparative periods last year when there were issues relating to filing returns with the tax authority rather than anything more troubling.