Stocks With Good Growth, But Poor Outcomes

By Stephen D. Simpson, CFA | December 22, 2010 AAA

Given the stock market's bottomless appetite for growth, it stands to reason that companies posting solid growth will see good performance in their stocks. In most cases, this is true. But like every good rule of thumb, this is one that has some exceptions to it. Examining a list of some of the notable "growth underperformers" this year might be a good place to start an investor's after-Christmas shopping.

IN PICTURES: 5 Tips To Reading The Balance Sheet

No Good News in Healthcare
If any sector is due for a rebound in 2011, healthcare might just be it. These companies already had enough problems with the recession - a poor job environment and overall economic worries have either taken away people's health insurance or made them very nervous about spending any extra money. As a result, patient visits are down, procedure counts are down, and hospitals are skittish about buying any non-essential equipment. Then the FDA decided to pick 2010 as the year to make a statement that it was prioritizing safety above all else and that new drugs and devices would have to pass a new and unpublished "double secret probation" to reach the market.

In that environment, both Intuitive Surgical (Nasdaq:ISRG) and Nuvasive (Nasdaq:NUVA) have found their status as one-time med-tech growth darlings come into doubt. Both have posted excellent and distinctly above-average growth (roughly 40% and 35%, respectively) and yet lagged the broader market by a meaningful amount (9% and 13%, respectively). Both stocks may be basing, but investors will need to see some assurance in the next quarterly report (or two) to feel comfortable about pushing these stocks up again. (For more, see Investing In The Healthcare Sector.)

Not All Tech Is Hot
Tech has been a solid performer in this year's rally, but not all tech stocks are enjoying the ride. In fact, three of the largest and best-known tech stocks have lagged the market to a significant degree. Applied Materials (Nasdaq:AMAT), Google (Nasdaq:GOOG) and Cisco (Nasdaq:CSCO) have all posted excellent revenue growth over the past 12 months - up 90%, 22%, and 20% - but all have lagged the market.

Applied Materials' stock (up about 2%) has been dogged by worries about whether the semiconductor rally is over for this cycle and whether equipment demand will begin to pull back sharply. Cisco (down 15%), on the other hand, has given some iffy guidance because of lower government orders and there now seem to be whispers and rumblings that this one-time leader is losing its leadership to faster-moving rivals like F5 (Nasdaq:FFIV). Google's malaise (down about 1%) is a bit more puzzling; investors may be presuming that Apple (Nasdaq:AAPL) is building an insurmountable lead in smartphones.

Material Growth on Sale?
Even though resource companies have seen a mighty rebound in the back half of 2010, not all companies have been invited to the party. Steel companies like AK Steel (NYSE:AKS) and Steel Dynamics (Nasdaq:STLD) have lagged as tepid guidance counterbalanced excellent reported growth. Elsewhere, Ultra Petroleum (NYSE:UPL) and Southwestern Energy (NYSE:SWN) managed to post double-digit growth due in large part to aggressive production expansion, but investor concerns about the price of natural gas and potential industry-wide overproduction have left these stocks as laggards. (For further reading, check out Market Cycles: The Key To Maximum Returns.)

A Brighter New Year?
If these stocks can maintain solid growth profiles in 2011, it seems likely that investors will return to these names with some enthusiasm. After all, nothing smooths over fears about future growth like growth. All of these companies have work to do, though, and industry concerns can linger long enough to seriously frustrate early buyers. Nevertheless, all of these companies boast above-average quality and are worth consideration as possible 2011 rebound stocks. (For more on this subject, check out 7 Ways to Position Yourself For Recovery.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. This 6.5% Yielder Is Poised To Soar... Thanks To Its 'Stealth Catalyst'

    This 6.5% Yielder Is Poised To Soar... Thanks To Its 'Stealth Catalyst'

  2. India Remains An Emerging Market Bright Spot
    Stock Analysis

    India Remains An Emerging Market Bright Spot

  3. Why There's Upside To Silver's Four-Year Lows

    Why There's Upside To Silver's Four-Year Lows

  4. 4 Reasons To Love Monthly Dividend Payers

    4 Reasons To Love Monthly Dividend Payers

  5. Alt-Energy Up on Emerging Markets - Industry Outlook
    Stock Analysis

    Alt-Energy Up on Emerging Markets - Industry Outlook

Trading Center