Beaten Down Stocks With Expected High Growth

By Kristina Zucchi, CFA | October 11, 2010 AAA

This market has taken its toll on almost every company, weak and strong alike. But the strong companies with good growth prospects should come out on top. Many of these stocks got beaten down after the slightest misstep, despite future expectations, or have been lumped together with other poor-performing industry peers. Value inventors should find these stocks extremely attractive - trading at cheap valuations vs. peers, and with strong future growth prospects.

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The Value Bunch
Tower Group (Nasdaq:TWGP) provides commercial and personal P&C insurance. Peer companies have been subject to valuation retracement because these companies have felt the "AIG effect". The "AIG effect" has subjected insurance companies to extreme scrutiny for their investment portfolio and risk profile. Towers has a trailing 12-month (ttm) P/E of 9.8, vs. the industry average of 8.6. This may not be very compelling, but when the historical growth of over 42% vs. 14% for the industry is factored in, the high P/E ratio is justified.

Healthstream (Nasdaq:HSTM) is in the unique business of providing internet-based learning and research solutions for the training, information and education needs of the healthcare industry in the United States. This company helps healthcare providers analyze and interpret survey data, such as the patient survey. It also provides training software for healthcare providers. This business has very little national competition, but does face more local or regional players. HSTM has a ttm P/E of 10.5 times, vs. similar companies of 23 times, and has above average growth rates. This is a business which should continue to flourish as patients become more consumer-oriented and the choice in healthcare takes center stage.

Mercury Computer Systems (Nasdaq:MRCY) designs and manufactures high-performance embedded, real-time digital signal and image processing systems and software for computer systems in the aerospace and defense markets. This company competes in a crowded hardware and software industry, but only in this small niche market. However, it is dependent on government spending and contracts - a difficult position in the current economic state. But it does benefit from the current ongoing foreign wars. The valuation is extremely compelling, with a ttm P/E of 11 times, vs. the rest of the industry 13.9 times, and has much better financial strength.

Inventure foods (Nasdaq:SNAK) produces and sells snack foods in the United States under several brands, such as T.G.I.Friday's and Burger King. While the ttm P/E is on par with its peers, SNAK's growth profile is certainly more attractive, with historical sales growth of 13.63%, while the industry lagged with only 4.4% growth.

The Bottom Line
The recent market has not been kind to stock picking. But in the long run, valuation should impact stock performance. Finding stocks that are undervalued in good businesses should result in price appreciation that outperforms the broader market. These four stocks are expected to grow faster than the market in good industry segments - a value investor's dream. (Buying value stocks that are moving higher helps investors steer clear of value traps. To learn more, see Value Investing + Relative Strength = Higher Returns.)

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