One of my experiments over the years has been to search for companies that I have dubbed true growth stocks. These are companies that have grown sales and earnings better than 15% over the last decade. I further cull the herd by refining the search to include only those companies where management has successfully reinvested profits in the company, and the net worth of the enterprise has also grown by at least 15% over that time period.
This narrows the focus to just those companies whose management has done a great job of growing the business and not wasting earnings on bad acquisitions, poor products or overpriced share buybacks. In keeping with the Jacobian tradition (invert, always invert) of always looking at the other side, I have searched for management teams that have been able to grow the company in a decade when sales and profit growth was difficult to achieve.
I set up a new screen to look for companies that have not been able to increase sales or earnings in the past decade. I then filtered the list to include only those companies wherein the net worth of the company grew over that time period. Although it is merely a starting point, this gives us a list of companies where management has been able to manage cash flows, cost cutting and other tools to increase the value of the company. It strikes me as a way to find some potential gems that could be blockbuster stocks when their industry and economic conditions turn more positive.
As you might expect, financials lead the list. As a result of the credit crisis most banks have seen sales and revenues drop off a cliff over the past few years, wiping out the previous five years' worth of strong gains. Leading the list is a bank that I have always said had the most reason to be upset by the bailouts. Had the leading banks been allowed to fail back in 2008, BB&T (BBT) would have been one of the major regionals to become a major money center, in my opinion.
While BBT's sales and profits are well below the levels of 10 years ago, tangible book value is some 25% higher than it was in 2002. Acquisitions have increased the bank's footprint and asset base over the decade, and the bank has purchased failed and distressed banks at bargain prices in the past few years. As the economy and the banking sector improve, BBT could easily post double-digit growth rates over the next decade.
One of the more intriguing stocks on the list is MarineMax (HZO). The company is the largest retailer of boats and yachts in the U.S., and its sales and earnings have suffered along with the economy. This company fits into my "addictive lifestyle" classification of stocks since most enthusiasts consider boating not an addiction rather than a hobby. They might delay their purchase of a new boat, but they will never give up the plan to buy it. When the economy is back on track, boats will get bought. Pent-up demand for MarineMax's line-up of boats will explode at some point in the next few years, and this stock should be a top performer, rising to many multiples of the current quote.
Many of the company's competitors have disappeared in this prolonged period of economic weakness. So, even as its revenues have declined, MarineMax has seen its market share increase during the past few years. Management has been able to increase book value by roughly 25% during the past decade in a very weak sales environment and has the company poised for success when demand returns. As a bonus, the stock trades at about 80% of tangible book value right and is cheap enough to start accumulating. In better times, the shares routinely fetched between 2x and 3x tangible book value, and I think they will do so again in the future.
At first glance, this screen seems like a decent way to identify companies with strong management that have negotiated through tough industry and economic conditions. Like all screens, it is a starting point, but, one really needs to do the homework with these stocks even more than with traditional value screens. There are enough interesting and promising names on this list, so I am adding this to my arsenal of screens and will run it a few times annually.
