Pick Stocks With Sustainable Growth

 | Oct 07, 2013 | 11:30 AM EDT
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Investors have had a good year so far in 2013, even with the recent government squabbles and the second week of the government "shutdown" beginning. The S&P is up over 18% as we start the fourth quarter of the year. Unfortunately, earnings growth has not been nearly as steady with S&P earnings up just around 5% so far in the year.

Many gains in the market have been driven by multiple expansions as the price-to-earnings ratio for the S&P has gone from 14.7 to start the year to a current 16.5. The continued liquidity provided by the Federal Reserve has been one of the primary drivers of this multiple expansion.

The good news is that the recent 'hiccup' in D.C., has probably pushed back the need for the Fed to start to "taper" by several months. The bad news is that all good things must eventually come to an end. As a result, a good portion of 2014 will probably see steady and incremental draining of liquidity by the Federal Reserve.

This has put heightened importance on being in companies with sustainable earnings growth that is higher than the overall market. The companies should also offer reasonable valuations.

Here are two of these types of companies that I expect to continue to increase earnings at a solid rate regardless of the actions that the Federal Reserve and Washington take.

Gilead Sciences (GILD) --This large biopharmaceutical company has a market leading HIV franchise and is rapidly growing in the Hepatitis C space as well. Gilead is tracking to over 10% revenue growth this fiscal year which analysts believe will accelerate to almost a 25% sales increase in 2014 as new products for Hepatitis C take hold. Hepatitis C actually has a larger infected domestic population than HIV.

The stock is somewhat pricey at just under 21x forward earnings. However, the company should have several years of 20% growth in revenues and earnings ahead of it. It should also benefit with the rollout of the Affordable Care Act as the incidence of Hepatitis C and HIV is significantly higher in the currently uninsured population than among the insured.

Whiting Petroleum (WLL) -- This fast growing Bakken energy producer has been on my radar and in my portfolio for some time. It is up some 40% since I profiled it in May  but I still think it has long-term upside on growing production.

Consensus earnings estimates for both FY2013 & FY2014 have moved up sharply over past three months and the company should post better than 20% year-on-year earnings growth this year on a similar gain in revenues. The shares are priced at 15x forward earnings, in line with its five-year average.

Two items have upgraded my view on Whiting recently. First, SunTrust Robinson raised its price target on the stock to $92 a share from $69 last week. Its analyst believes the well completion techniques the company is pioneering have substantial potential to significantly raise production and lower operating costs.

 In addition, Repsol recently stated it wants to spend $5 billion to $10 billion to acquire faster growing energy production in North America. With a market capitalization right around $8 billion, Whiting is right in that price range.

I think both these stocks are attractive to long-term growth investors as they should continue to grow nicely regardless of what government institutions decide to do in the coming months.

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