GROWTH STOCKS ATTRACTIVELY VALUED
My Growth Stock Recommendations emphasize reasonable debt, increasing revenues, not-overvalued prices, and of course the mandatory good growth outlook. They are companies that I think provide growth at a reasonable price (GARP). I like all of the companies on the list, but those stocks in blue satisfy all of the GARP criteria and are the most attractive now.

The list also includes the traditional measures: the 52-week price range, earnings per share (EPS) for the current year, and the current P/E (price divided by earnings per share). Behind the scenes screening for good management is not revealed specifically by a statistic on the list, but I consider this ingredient to be as important as any of the others, and no company makes the list unless I have reason to believe management is top-notch.

Linda Stewart for www.fizone.com

February 19, 2003

Flextronics' future depends on a rebound in technology in general. They are an electronics contract manufacturer, which gets business from original manufacturers that want to cut costs by contracting out production. They have lots of competitors, but have a strong, blue chip customer base. They are the only company on my list with negative EPS, but they have increased revenues each year. It’s difficult to find promise in technology--still.

ADP' P/S and PEG suggest it is a bit pricey, but it has no debt, and its earnings consistency is reassuring: 41 straight years of double-digit EPS growth. At the low end of its 52-week trading range, I am comfortable recommending this payroll processing company.

First Data is a leader in credit card and money transfer processing. They own Western Union, which earns great returns. They have a lot of debt (the nature of the business), but they also generate a lot of free cash flow.

Pfizer was already the largest pharmaceutical company and recently merged with Pharmacia. The two have 10 drugs that each provide more than $1 billion per year in revenue, and several blockbusters (Lipitor, Viagra, and Celebrex) that are patent-protected for seven or more years.

Teva Pharm. manufactures generic drugs, many of which are awaiting FDA approval. They should be beneficiaries of upcoming patent expirations and the trend to use cheaper, generic drugs. The biggest caveat: they are based in Israel.

Fannie Mae As a provider of liquidity for residential mortgage investing, Fannie Mae may see a considerable slow-down over the next year as refinancing diminishes. But this company has an excellent record of increasing revenue each year.

Marsh & Mclennan, like Citigroup, is a diversified financial services company; it dominates the insurance brokerage industry, an industry benefiting from higher premiums. Its P/S suggests it’s a little over-priced now, but it is a solid company worth keeping an eye on.

Global Santa Fe is an international offshore and land drilling contractor. It has little debt and a good growth outlook, as long as its customers (Exxon, Texaco, Chevron, etc.) pick up their prospecting for new oil sources. Oilfield services revenues have been hurt by the reluctance of E&P firms to spend on drilling for natural gas (85% of the drilling market). When demand exceeds supply, Banc of America Securities analyst James Wicklund “ . . . sees the potential for oilfield stock prices to rise 43% over the next 12 months.”

L3 Communications – This mid-cap technology company supplies sophisticated and specialized secure communication systems and instrumentation to aerospace and defense contractors and to defense agencies of the U.S. government. Organic sales growth is expected to exceed 8-10% in 2003 because of strong defense budgets, and to increase overall by 16% due to new revenue from acquisitions, according to S&P’s company report. The downside is that their growth depends on defense spending and is somewhat driven by a strategy of acquisition, which can be risky.

IDEC Pharmaceut. – This mid-cap biotechnology company makes immunotherapeutic products which use the body’s own immune system to defend against disease. Their genetically engineered Rituxan and Zevalin are cancer-fighting drugs that drive their revenue growth and should continue to provide future cash flow. The P/S ratio is very high, but so is the growth outlook, and the other fundamentals are very strong.

WellPt. Health Net – Operating under the Blue Cross Blue Shield name, its networks include an HMO, a PPO, a variety of flexible managed-care plans, and its own pharmacy benefit management service. Its flexible deductible and co-pay plans allow it to capture market share in each customer tier, which is a competitive advantage. Paying claims quickly and closing books monthly also makes them more nimble than competitors at monthly projections and identifying trends. Fundamentals are strong; lawsuits pose the primary risks.

American Int'l Group – This financial services conglomerate specializes in insurance, an industry of many competitors. AIG’s two biggest plusses are its foreign insurance businesses and its CEO Maurice Greenberg, 76. Less competition overseas has helped with AIG’s growth and profits, as has the company’s strong management. This company has a long history of solid growth, which should continue, even if more modestly than that of true growth stocks.

Lennar – This mid-cap homebuilder also provides residential financial services. They have increased revenue each of the last five years, helped considerably by low mortgage rates. Although rates are bound to increase eventually, the firm should continue to benefit from the anticipated 15% rise in home sales in 2003. Management has concentrated their operations in areas of fast-growing housing markets: Arizona, Florida, and Texas.

There were no changes to Blue List stocks from the last report.

Cisco – CEO John Chambers, after reporting better than expected second quarter earnings, indicated that he expects third quarter (April) revenues to be flat to down from the second quarter revenues; he said that CEOs are being more conservative in their tech spending than they were a quarter ago, signaling a customer contraction and causing him to be cautious about 2003. Analysts’ consensus estimate for five-year growth went from 21% to 16%.

Comcast – There are just too many question marks because of the “merger” with AT&T Broadband. What’s the debt of the combined entity; what are their combined revenues; what is the growth outlook? Will the costly upgrade planned for the cable system win back enough subscribers? It may turn out that now is a good time to buy Comcast, but I will hold off on recommending it for now.

Citigroup – 2002 was a rough year for Citigroup. Revenues for the year were down from 2001, partially due to litigation costs regarding the company’s stock research practices and its dealings with Enron. Analysts have lowered their five-year growth outlook from 14% to 13%. I am not convinced this company is headed in the right direction.

WalMart has demonstrated exceptional ability to grow revenues year after year, and there is no reason to believe that won’t continue. Although it is too over-valued to stay on my list now, I would consider buying if the price went below 40.

Cardinal Health gets most of its revenues from its pharmaceutical distribution division; but it is a diverse health care company. It manufactures drugs and medical supplies, develops drug-delivery technologies, and offers services that make health care more efficient. It has increased annual sales each year for the last six years and has excellent fundamentals all-around.

Capital One is primarily a credit card business. Its fundamentals are excellent, having grown revenues annually about 40% for the last five years and being reasonably priced now. Risk is inherent in a company that extends credit.

General Dynamics If you don’t mind investing in a defense company, this one has excellent fundamentals and annual sales growth of 20% since 1998. Part of that growth can be attributed to acquisitions, such as the commercial small jet maker Gulfstream. This acquisition also diversified their revenue source beyond the defense business.

United Technologies has four major businesses: Otis elevators, Carrier heating and air conditioning, Pratt & Whitney jet engines, and Sikorsky helicopters. UT’s management team uses the sizable cash generated by their businesses for research and development, buying back shares, and for making acquisitions that further strengthen existing businesses.

Autozone is the national leader in retail auto parts and has increased revenues in each of the last ten years. Although it has some debt and its estimated growth rate may prove too high, the company should continue to be driven by the do-it-yourself culture and the growing number of aging autos.

Costco has increased its revenues every year for the last ten years, and January same-store sales grew by 5%, more than double WalMart’s. This stock is on my list because of its reliable revenue growth rate: 12.43% annually over the last five years; it is estimated to grow annually at least that much for the next five.

Home Depot has consistently grown revenue over the years, but they recently lowered their guidance for 2003 to 9-12% sales growth, prompting growth investors to dump the stock. The stock price is now near its five-year low, making it very appealing to value investors. As Warren Buffet (value investor extraordinaire) said, “ . . . you pay a very high price in the stock market for a cheery consensus.”