Growth Stocks To Watch

By Investopedia Staff | June 01, 2012 AAA

Identifying a "cheap" stock can go beyond seeking out a low P/E or low price to book stock. More so, a stock that looks cheap based on statistical measures of value can be cheap for a very good reason and prove frustrating for investors. Many investors - and rightly so - find value in stocks that offer promising future growth. The key is to pay as little for that growth as possible in relation to the actual growth you are getting.

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1. Apple (Nasdaq:AAPL)
Growth has certainly become more expensive for value seeking investors over the past several months. Yet if you want to bet on continued growth, the obvious name that comes to mind is Apple, which is trading near its all-time highs, can still be a great pick. Shares still trade for aprox 19 times earnings, despite revenue and profit growth in excess of 40%.

In addition, Apple has over $25 billion in excess cash that when stripped out of the company, makes the shares look a little cheaper. Sales of the iPads are growing like a weed and that will likely continue to propel the company even further.

2. Lufkin Industries (Nasdaq:LUFK)
At first blush Lufkin Industries looks absurdly expensive at 55 times earnings. In actuality, the company's earnings have been depressed and look set to expand. Lufkin makes artificial lifts for the oil industry. Lufkin holds a large market share. Shares trade for 17 times forward earnings, but increased interest in shale gas could increase demand for the company's products further. To be sure, this stock is not cheap, and growth is not a given. But Lufkin has been in business for over 100 years and is considered a market leader.

SEE: 9 Simple Investing Ratios You Need To Know

3. Transocean (NYSE:RIG)
The oil rig provider may turn out to be a compelling play over the next few years. Despite the fact that shares had once doubled since the Gulf oil spill in 2010, Transocean's profits could swell over the next few years as demand for ultra deep water drilling rigs remains robust. Shares trade for aprox 1.2 times book and 11 times forward earnings. To appreciate the potential, consider that the low and high EPS estimate for the company in 2011 was $6.78 to $12.50. Shares trade for $42 today.

SEE: A Primer On Offshore Drilling

Transocean shares once traded for seven times EBITDA. Rival Ensco (NYSE:ESV) had agreed to buy competitor Pride (NYSE:PDE) for $7.3 billion in cash and stock, or a valuation of 21 times EBITDA. By most counts, this deal was viewed as an expensive purchase for Ensco. Even so, Transocean shares look incredibly compelling at the current valuation.

Price Determines Value
When a company achieves quality growth, it will almost always create value. However, the key for an investor is not to overpay for that growth as that can turn good growth into a bad investment.

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