Trawl for Those Earnings Jewels

Over the past year and a half, there has been the paucity of earnings growth -- and it's one item that has gotten short shrift among financial pundits. Yet the fact remains that, as equities rallied more than 30% in 2013, profit rose only 5% from the prior year among S&P 500 companies. That weak earnings growth has not improved so far this year, either. At this point more than 90% of the S&P 500 have reported first-quarter results, and earnings have only climbed a little over 2% year over year. This is projected to accelerate to 6% in the second quarter but, given recent trends, the more likely result is 2% to 4%. What's particularly concerning is that this tepid earnings growth is occurring even as S&P 500 companies have bought back hundreds of billions of dollars' worth of their own shares over the last year. This lukewarm growth has impacted the market in many ways over the past 18 months. For instance, last year investors chased stocks -- such as Netflix (NFLX) -- that saw impressive earnings increases, even as share valuations reached what many would consider silly levels. Of course, since March, those momentum stocks and sectors have been under intense pressure as investors have rotated out of 2013's stars and into safer stocks with lower valuations. This is one reason that Apple (AAPL) stock has done so well in 2014 after significant underperformance vs. the broad market last year. The tech giant sees in 6% to 7% annual revenue growth and 10% earnings increases, its dividend yield is over 2% and its share valuation is below that of the overall market. All of these metrics are quite appealing in the current environment. Apple stock is up more than 10% for the year, and on Mondays the shares closed above the $600 level for the first time in two years. I believe these types of growth-at-a-reasonable-price plays will continue to outperform throughout 2014. This means growth investors need to continue avoiding the momentum names, such as Tesla Motors (TSLA), that have excessive valuations. It also means passing on names, like IBM (IBM), whose earnings growth is the result of cost cuts and stock repurchases, and which haven't seen any revenue growth in years. Devon Energy (DVN) is another stock that's similar to Apple: The company is delivering solid earnings and revenue growth, and the stock is still reasonably priced. Devon continues to transform into more of a pure play North America-focused exploration-and-production concern, and the shares are selling at just over 12x forward earnings. This is a significant discount to the overall market, even as Devon grows its top and bottom lines much more quickly than the average S&P 500 company is doing. Devon stock has risen some 15% so far this year, but it still has room to move higher. For investors seeking out companies with exponential earnings and revenue growth, yet with shares that are still selling for a reasonable multiple, I continue to pound the table for Gilead Sciences (GILD). In fact, I doubled my stake in the recent biotech selloff, and the stock is currently the biggest position in my portfolio. Gilead's new hepatitis C drug, Sovaldi, looks as if it will bring the biggest drug launch in history. Furthermore, the company's earnings are predicted to triple this year on the back of almost doubled revenue. Despite this, the stock sells for under 15x forward earnings, a slight discount to the market. What is quite apparent in the first five months of 2014 is that this is not last year's market, when a rising tide lifted all boats. Growth investors will need to be more selective if they're to continue outperforming the market.

Trawl for Those Earnings Jewels

Given the overall lack of profit growth, these nicely priced earnings growers should continue to do well.

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