Thursday, January 31, 2013

Cheap, Quickly Growing Stocks for 2013 (Part I)


Many investors often pick their style as  “value” or “growth” investors, but in doing so they separate value and growth. It was Warren Buffett who thought that growth was one of the indicators of value. Thus, growth should be one of the inputs used to calculate the intrinsic value of businesses. I myself like to look for high-return companies that have experienced decent growth over the last 5 years, but are cheap in terms of the PEG ratio (the P/E ratio in which the growth is factored). More specifically, my criteria are: (1) 5-year EPS growth was higher than 25%, (2) return on Investment was greater than 25%, (3) no long-term debt, and (4) PEG ratio is less than 1x. Here are the first two stocks that meet my criteria:
Apple (NASDAQ: AAPL) has been the most famous stocks of 2012. Though it used to be the highest market cap publicly traded company in the world, Apple's value has dropped heavily since September 2012. Many investors have varying opinions about Apple; some are still bullish, and some are quite pessimistic. Since the middle of 2012 Apple has begun to pay dividends twice, to return its huge cash position to its shareholders. The dividend yield is around 1%. In the past 5 years, Apple has grown its EPS tremendously, from only $5.36 to $44.15, marking an annualized growth of 52.46%. Its wonderful record of extreme growth was the result of creative innovation in the technology field, particularly in the mobile and tablet industries.
Apple is running on its iOS system, competing head-to-head with the Android system ofGoogle (NASDAQ: GOOG) and Samsung. According to IDC, iOS is still a leading tablet operating system now, accounting for 53.8% of the market in 2012, and it is expected to remain the leader in the market into 2016, with an estimated 49.7% market share. Android still ranks second, with 42.7% of the market in 2012, and is estimated to account for 39.7% of the total tablet operating system market in 2016. Windows, from Microsoft (NASDAQ: MSFT), currently owns around 2.9% of total market share, but IDC estimated that it would experience the highest compounded annualized growth in the period of 2012-2016, around 69.2%, to take 10.3% of the tablet operating system market. 


Trailing twelve months, Apple delivered a 42.84% return on invested capital. The extremely high growth and high return on investment was generated via debt-free operations. Currently, Apple is trading at $509.59 per share, with a total market capitalization of $479.37 billion. The market is valuing Apple at only 11.5x trailing P/E and 0.5x PEG.
American Public Education (NASDAQ: APEI) is the second company that appeared in my list after my stock screener. It is the online post secondary education provider, focusing on military and public community services, via two main universities: American Public University and American Military University. Although its market capitalization is barely more than 0.1% of Apple’s, APEI is quite the high growth stock. Its EPS has grown from $0.64 to $2.23 per share, an annualized growth of nearly 28.36%. It has been a consistently growing cash flow generator. Trailing twelve months, APEI generated $57 million in operating cash flow and $17 million in free cash flow. The LTM return on invested capital was 30.57%.  Interestingly, the high return was generated from the debt-free oprations.
Currently, it is trading at $35.42 per share, with the total market capitalization of $639.84 million. The market is valuing the company at 15.2x trailing P/E and 0.9x PEG. The historical number looks great, but Jim Chanos has expressed his views on the whole industry in which APEI is operating. He thought that the business model of for-profit education was not right, as all those companies depended on taxpayer’s money to guarantee the federal loans they profit from.
Foolish Bottom Line
Personally, I think it is worth another closer look into APEI's fundamentals, as well as the macro environment of for-profit education, to determine its investment attractiveness, even though the historical numbers were quite compelling. Apple, even with a lot of recent criticism, is still valued much cheaper than boring Microsoft, with 14.4x P/E and 1.1x PEG. With the fantastic infrastructure it has built, and integrated devices including mobile phones, tablets, and PCs, Apple would serve investors well in the long run.
Disclosure: Long AAPL

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