It's been quite the volatile year so far in the stock market; it appears that after rebounding fantastically from the lows in early 2009, the stock market has met our nascent economic recovery head-on in a confrontational "prove it to me" moment.
Most investors know they want to continue participating in the market, but a 15% decline since April has many of us reaching for the antacids.
The following stocks may prove to be a soothing option for both the nervous and the opportunistic. They are culled from a screen that filtered for a track record of good growth, below average market valuations and strong balance sheets.
* A market capitalization above $2 billion;
* Above 15% on each of these three metrics: five-year earnings growth, return on equity and operating margins;
* Current ratio > 1.0 (this is the ratio of current assets to current liabilities, with results over 1 a nod to balance sheet stability);
* Forward P/E ratio under 13 times estimates, which is the current level of the broad market (as measured by the S&P 500);
* And finally, a PEG ratio under 1; this metric is a personal favorite and highlights companies that are forecast to grow faster than their P/E ratios indicate. (For more, check out Move Over P/E, Make Way For PEG.)
This turns out to be a stringent screen; only 27 stocks make it through.
Here Are Some Hand-Picked Favorite Survivors
Aeropostale (NYSE: ARO) - The apparel retailer has nicely positioned itself between fashion-forward and wallet-friendly customers, helping Aeropostale to crush its rivals in the past \two years. The company grew same-store sales by 8% in the May quarter while competitors were lucky to be flat.
More impressively, a JPMorgan study of teen retailers showed that Aeropostale increased its market share from 5-11% between 2005 and 2009. The Abercrombie & Fitch (NYSE: ANF) and Old Navy (GAP) (NYSE: GPS) brands both lost share, vaulting Aeropostale to second place in the group behind American Eagle Outfitters (NYSE: AEO).
Bucyrus International (Nasdaq: BUCY) - The maker of heavy-duty mining equipment recently bought the mining division of Terex Corp. (NYSE: TEX), which positions Bucyrus as a "one-stop shop" for major customers. This should help to drive future sales to places like Asia and South America, where mining continues to boom. Any eventual North American recovery is largely unpriced in the shares, which trade for less than 10 times earnings estimates.
Gilead Sciences (Nasdaq: GILD) - The biotech giant is both success story and cautionary tale. As one of the original biotechs to hit the big time, it has seen its stock soar in the past decade, but it's also seen the valuation multiple compress. Part is simply due to the nature of large numbers, but it seems that the bigger a biotech gets, the more investors tend to treat it like a regular pharma stock rather than a biotech.
Gilead, for its part, is not acting like a typical pharma stock. Top-line growth in the latest quarter was over 35%, while earnings grew at a 50% clip. But the key differentiator continues to be that generic competition doesn't really exist yet for biotech drugs like those made by Gilead and Amgen (Nasdaq: AMGN).
Now is a perfect time to get ultra choosey about the stocks in your portfolio. You don't have to settle for just growth or just value. Thanks to a volatile market pushing stocks around with little regard for fundamentals, you can get opportunistic while keeping the all-important long-term focus. (For more, see Take On Risk With A Margin Of Safety.)