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June 20, 2005
Big Name Growth Stocks
Often when I interview a money manager, he or she is full of recommendations of stocks that are either too small or unknown to be of much use to the average investor. The companies may sound like original ideas -- which is what you's expect from a money manager -- but if they aren't recognizable names, a prudent investor would need to do a lot more research before buying one of the individual picks on his or her own.
That's why I was interested in the big-cap growth stock picks of Christopher Zook, a money manager in Houston, who stopped by the office last week. He offered up a list of household names -- like Microsoft, AIG, Wal-Mart -- that he thinks it makes sense to buy now.
For more details on his methodology and why he likes the stock, you can check out the full story.
But the 10 stocks he named are:
American International Group (AIG)
Eastman Kodak (EK)
Cisco System (CSCO)
Morgan Stanley (MWD)
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I spend a lot of time trying to identify what I consider to be strong growth stocks with the possibility of price appreciation.
I believe that it is the three-pronged effect of free cash flow, revenue growth, and earnings growth, in the face of a reasonable balance sheet that allows one to have more than a 50% probability of investing in a successful stock for the long-term.
The Morningstar.com website is very helpful for evaluating stocks, especially their "5-Yr Restated" page.
Some of the stocks on the list are indeed attractive from that perspective, but I have a bit of a hard time justifying a stock like Xerox, which indeed has been growing their earnings nicely from a loss of $(.48) in 2000 to a gain of $.81 in the trailing twelve months, and also is generating considerable free cash flow, but it faced with a shrinking revenue that has decreased from $18.8 billion in 2000 to $15.7 billion in the trailing twelve months. Xerox also has a heavy debt load with $10.5 billion in current assets balanced against $5.9 billion in current liabilities and $12.1 billion in long-term liabilities.
Let me contrast that with a stock that I recently reviewed, that I do NOT own shares in, Cintas (CTAS). Cintas is a uniform provider. This is not a small company; in fact it has a market cap of $7.6 billion. However, their financial picture is cleaner with revenue growing steadily from $1.9 billion to $3.0 billion in the trailing twelve months, earnings growing steadily from $1.14/share in 2000 to $1.68/share in the trailing twelve months, and free cash flow improving from $270 million in 2002 to $309 million in the trailing twelve months.
Loooking at the Cintas balance sheet we can see that they have $1.2 billion in current assets, balanced against approximately $960 million in current liabilities and long-term liabilities combined.
Thus, the triad of persistent revenue growth, persistent earnings growth, and solid free cash flow, along with the quality balance sheet makes this stock a "pick" in my opinion.
To call a stock with declining revenue a "great growth stock" is a misnomer. With a little big of homework, the average investor should be able to grasp these financial fundamentals and put their own stock ideas to the test.
Posted by: Robert Freedland at July 19, 2005 12:12 PM