This is the last article in my 3 part series about a growth portfolio with high return but cheaply valued stocks in 2013. I have talked about 4 stocks, each of which fits perfectly our four criteria: (1) more than 25% EPS growth, (2) more than 25% return on investment, (3) no long-term debt, and (4) below 1x Price-to-Earnings Growth ratio. Those already-covered stocks areApple, American Public Education, Baidu, and Questcor Pharmaceuticals. In this article, I will unveil two more growing stocks that investors might consider for their growth portfolio in 2013. One is in the specialty retail industry, and the other is in the business of manufacturing drugs.
Fast Followers and Broad and Shallow Merchandising Strategy
Many investors and shoppers have heard of Francesca’s Holdings (NASDAQ: FRAN). It is the upscale boutique for young and middle-aged female shoppers in the range of 18-35 years old, with around 51% of the total net sales derived from apparel. Even though no vendors represented more than 15% of the retailer’s total merchandise purchases, the two largest vendors belonged to Francesca’s founders’ relatives.
Francesca’s is known for its broad and shallow merchandising strategy, meaning that it had a lot of selections for customers, but only several items in the inventory for each style. If it was sold out, shoppers might not have the chance to buy that item again. Thus, it always offered unique, refreshing merchandise for customers. Indeed, in its conference call, John De Meritt, Francesca’s President and CEO, believed in the company’s ability to chase fashion trends, describing the company as “fast followers.” He said:
As fast followers, we identify mainstream trends versus emerging trends, which is one distinction. We then source these trends from hundreds of domestic vendors and deliver it to our boutiques in a relatively short timeframe. We also typically buy merchandise for delivery no more than 90 days out. This gives us the unique ability to source merchandise on a practical real-time basis. So as trends become mainstream, we use our available near-term open-to-buy to follow these trends.
In addition, the low inventory for each style helps the retailer turn over its inventory quickly, resulting in low fashion risk.
Fast Growing With Cheapest PEG
In the last 3 years, Francesca’s has grown EPS from -$1.99 to $0.52 per share. Trailing twelve months, its EPS has reached $0.91 per share. It also delivered quite a high return on invested capital. Over the last 12 months, its ROIC was 82.83%. Currently, the retailer is debt-free. As of October 2012, it had $56 million in total stockholders’ equity, no debt, and $13 million in cash. It is trading at $24.92 per share, with a total market capitalization of nearly $1.1 billion. The market is valuing it at 27.5x P/E (seems pricey?), but only 0.7x PEG. It is still cheaper than Urban Outfitters (NASDAQ: URBN), which is trading at 28.7x earnings and 1x PEG. Its other peer, Ann (NYSE: ANN), is trading at a lower trailing earnings multiple of 15.5x, but higher valuation in terms of growth, at 1.2x PEG.
Volatile Growing Drug Manufacturer
POZEN (NASDAQ: POZN) has the smallest market capitalization of the 6 growth stocks for 2013. It is trading at $4.98 per share, with a total market cap of only $150.94 million. Since 2010 it has consistently generated very high return on invested capital; trailing twelve months, its ROIC was 63.76%. POZEN is in the business of in-house drug developing and manufacturing, while other strong commercial partners market its products. The company said that it had received the FDA’s approval of its two self-invented products in two years. It currently has three licensed products, including Treximet, an acute treatment for migraine attacks, MT 400, for migraine headaches, and VIMOVO, for relief the symptoms of osteoarthritis, rheumatoid arthritis, and ankylosing spondylitis.
The company has experienced fluctuating business performance since 2007. In 2007, its EPS was $0.15; in 2011, it has grown to $1.40. However, it generated losses in 2008 and 2009. This drug developing and manufacturing company doesn’t employ debt in its operation. As of September 2012, it had $90 million in total stockholders’ equity, and $92 million in total cash and short-term investments. POZEN is valued at only 3.6x trailing earnings and only 0.4x PEG.
Foolish Bottom Line
Those two stocks conclude my growth portfolio of 6 stocks for 2013. All six stocks in these three articles have demonstrated their historically growing earnings, as well as high returns on debt-free operations. They are also quite cheaply valued if growth is factored in. However, POZEN, because of its volatile earnings, might be an opportunistic stock for investors. It is definitely not a good stock for holding in the long run at the current moment. Francesca’s Holdings, with its unique merchandising strategy, might still be a decent bet at the current PEG valuation.