Last night I was talking with an old friend, and the ridiculous discussion about growth vs. value reared its ugly head again. He, like me, is a dyed-in-the-wool value investor and he was dismissing growth out of hand. I think that is a huge mistake, as I know some folks who have gotten ridiculously rich using a growth-based approach to investing, and I know some value types who are also wealthy on a grand scale from their efforts over the years. Both work, and finding success is a matter of matching style to personality and skill set.
Fortunately, we can have both if we choose. We can find companies that are growing and trade at a bargain price and use those stocks to power our portfolio higher over the years. I sat down and ran a screen looking for such bargain growth stocks this morning. I use book value growth to measure growth, since it and free cash flow are the hardest numbers to fudge, and if the free cash flow is reinvested wisely the total net worth of the company should grow at a rapid pace. (By the way, if you disagree, just check the theory by screening for high five- and one-year book value growth. You will find that stocks like Apple (AAPL), Boeing (BA), Priceline (PCLN) and Keurig Green Mountain (GMCR) near the top of the list.) I looked for companies that had strong book value growth over the past five years and trailing 12 months and isolated those that traded below book value.
The most obvious thing I noticed when I ran the screen is that the list is dominated by oil- and finance-related companies. I was not surprised to see strong five-year growth for the energy companies and oil prices were fairly high for most of that period, but those that have been able to grow equity value over the past year did come as a bit of a surprise. With oil prices falling by 50% or so over the past year, some level of asset value reduction would have been expected.
Northern Oil and Gas (NOG) grew its book value by 28% on average the past five years and over the past 12 months it achieved a 26% book value growth rate. This is even more surprising when you consider that all of the properties are in Montana and South Dakota, a region where many oil and gas companies are starting to really struggle. Looking at the most recent report, I see production is up 29% year over year and proven reserves are up about 20% year over year. Most important of all, the company was able to hedge its production for all of 2015 and about half of 2016 at $89.53 a barrel, so it will be at least a year before lower oil prices become a huge factor for Northern Oil and Gas. Although it does plan to reduce capex by almost 75%, it plans to add about 20 new wells this year.
Looking at my two favorite financial measurements, the Altman Z-score makes me a little nervous as it is in the gray area at 1.24, but the F-score is a strong 8. Interest coverage is at 7x right now, so NOG can afford to keep the creditors paid and the lights on, but you are making a higher risk bet with this stock. At less than 70% of book value and the production hedges in place, it does look like you are getting a solid price for your bet.
Triangle Petroleum (TPLM) is another company that has been able to sustain decent growth in a tough environment. The five-year book value growth is 18% a year, and over the past 1 2months it actually did a little better, with 19% growth of net worth. Most of the acreage is also in the Montana and South Dakota region, and while Triangle did not disclose its hedge price in the latest press release, it does have a line item of more than $50 million in commodity futures gains compared to net income of $44 million, so it appears to be well hedged as well.
The company is not as solid as Northern, with an F-score of just 4 and a Z-score of 0.94. Interest coverage is 3.8x, so there is no danger in the short run of a calamitous financial event. If oil prices firm the F and Z scores improve quickly, the stock is worth watching here. The shares are trading at just 80% of book value right now and it is worth noting that management has been buying back stock.
Tomorrow I will look at some of the financial stocks that are growing nicely but available at a bargain price.