Growing Under the Radar

 | Jun 24, 2014 | 4:00 PM EDT  | Comments
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Stock quotes in this article:

mhg

,

bam

,

bpo

,

bip

,

nwli

My screen for undiscovered growth stock is a simple one. It searches for companies that are growing at above average rates and yet are still trading at reasonable valuations. While very few of them make their way into my deep value portfolio, they do make it into some of the longshot and turnaround portfolios that my kids and other younger investors favor. Stocks from this screen also go onto my "buy during a decline" watch list. When we get one of those rare inventory creation events in the market, they can become deep value bargains.

This screen looks for companies that have been growing sales and earnings at a rate of at least 10% a year over the past five years. It also checks that they are not heavily owned by institutions and could attract attention from big money buyers in the future. I created the screen to make sure that when the stocks are cheap based on the Graham Number that it takes earning power as well as asset value into account.

The screen produces a much shorter list than in the past. This has been the case with all value related screens that I use as the market works higher. Although it turned up only 25 names, the list has some intriguing ideas.

Marine Harvest ASA (MHG) is a Norwegian company that is in the salmon business. The company has fish farms, and it smokes and distributes the end product. They have farms, processing plants and distribution in 50 markets around the world. An increased global focus on healthier eating is causing a huge surge in demand for their products and earning shave grown at about 80% on average for the past five years. The stock trades right at its Graham number so buying in a pullback might make the most sense but it's hard to ignore the very high revenue and earnings growth they have had in the past year. To top it off, the company just raised its dividend and the stock is yielding more than 8% at current levels. Institutions own a miniscule amount of this company but I believe that is going to change in the years ahead.

I was surprised to see Brookfield Management (BAM) on this list of growth stocks being ignored by institutional investors. This stock is on the top of my "buy during a crash list" -- it is one of the best collections of property and infrastructure related assets in the world. There are few aspects of the global real estate and infrastructure markets that it is are not involved in – the company also offers asset management services to investors with an interest in investing in these types of properties.

I do not own Brookfield right now but I do have stakes in two of their offering Brookfield Infrastructure (BIP) and Brookfield Properties (BPO). If Brookfield ever drops down below book value, I would be a "back up the truck" buyer of the stock. The shares are currently trading at just 75% of its Graham number and they have been growing sales and earnings at a pretty good clip for the past five years. Just 61% of the shares of this company are owned by institutions.

I almost laughed out loud when I saw that National Western Life (NWLI) was on the list of under owned growth stocks. The company is widely ignored -- institutions own just 44% of the stock. There is nothing really exciting about this company at all. It just chugs along selling life insurance products in 49 state and maintaining a bullet proof balance sheet and investment portfolio.

The stock trades far below where it should and many blame the dual share class of stock that allows CEO Robert Moody to control the company. What they overlook is that he has done an incredible job of running the company and building shareholder value. Since Moody bought the company in 1963, National Western has returned about 15% a year on average. The stock sells at about 65% of book value and half its Graham number value.

The undiscovered growth screen is turning up only a few names right now, but those companies hold a great deal of interest. More growth oriented investors with a positive market view might consider buying these cheap growing companies at their current prices. All three are now near the top of my "buy during a decline" list.

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