STOCKS WITH VARYING FACETS OF GARPNESS
My Growth Stock Recommendation List, which emphasizes growth at a reasonable price (GARP)--a good outlook for growth, reasonable debt, increasing revenues, and not-overvalued prices—has at least three levels of GARPness.

• The stocks in blue (the Blue List) satisfy all of the GARP criteria and are especially attractive at current prices.
  
  
• Seven companies on the list are solid providers of growth year after year, just not stellar growth: ADP, AIG, Costco, Fannie Mae, General Dynamics, Home Depot, and United Technologies.
  
  
• Also included are some new names that are slightly speculative—I think they will do well in the anticipated economic recovery: a tech stock in good shape for the long-awaited tech recovery; a biotech because aging baby boomers provide greater demand for new drugs; an investment management firm which should benefit by investors’ return to the market; and a micro retailer that is well-run and benefits from an affluent clientele unencumbered by economic woes.

Linda Stewart for www.fizone.com

April 12, 2003

Flextronics has increased revenues in each of the last five years, even though a portion of their customers are in the telecom industry. They are the largest contract manufacturer, and they offer a wide range of services, which positions them well for that elusive return to capital spending by hardware companies. S&P sees 2004 EPS up 38%. The company reports fiscal year 2003 earnings on April 24, and they are estimated to be $0.32, the first positive EPS since 2000. This stock should take off when capital spending resumes.

ADP – Like General Dynamics and United Technologies, this payroll processor has some growth potential, but not as much as in the past. It dominates its industry (along with Paychex), but low interest rates and rising unemployment have combined to thwart earnings. This is a great company, priced attractively, that should reward shareholders as employment and interest rates pick up.

First Data, which owns Western Union, is a leader in credit card and money transfer processing. They just acquired Concord EFS and its STAR, MAC, and ATM cash station networks, which will enhance First Data’s fee income stream. The company recently announced that first quarter profits rose 20%, thanks largely to Western Union’s performance. They have a lot of debt (the nature of the business), but they also generate a lot of free cash flow.

IDEC Pharmaceut. – This biotechnology company develops and makes immunotherapeutic and cancer-fighting products, two of which, Rituxan and Zevalin, are used for the treatment of non-Hodgkin’s lymphomas. Zevalin’s targeted radiation therapy is a market of great potential and one in which Idec has exhibited expertise. The growth potential for Idec is great, but so is the potential for volatility and risk.

Pfizer was already the largest pharmaceutical company and recently merged with Pharmacia, adding to its already sizable research budget. 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. – The only reason Teva is not blue is its somewhat high P/S. Teva 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. Their products include generic equivalents of Glucophage (diabetes), Augmentin (antibiotic), Remeron (antidepressant), and Zanaflex (muscle spasticity). One caveat: they are based in Israel.

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.

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, and S&P expects a 9% increase in revenues for 2003. Like other solid companies mentioned in this list, growth may not be flamboyant, but will most likely continue to be in the low double digits.

Autozone is the national leader in retail auto parts and has increased revenues in each of the last ten years. The company should continue to be driven by the do-it-yourself culture and the growing number of aging autos. S&P added Autozone to their S&P Top Ten Portfolio (PR Newswire 4/10/03), their model portfolio. It “was chosen because the company is experiencing strong same-store sales growth, has high quality earnings, and has an active EPS-enhancing share buyback program.”

Global Santa Fe is an international oil and gas drilling contractor. It has little debt and a good growth outlook, but in the last two quarters has experienced higher than normal operating expenses, due to repair and planned maintenance of its rigs. Consequently EPS estimates for 2003 have been reduced to $0.64 per share, just over half of 2002’s $1.18 EPS. The projected 5-year growth estimate was only reduced to 17% from 18%, and 2004 earnings are projected to rise 30%, according to the S&P Company Report. The result is a P/E/G of almost 2.00, a bit high for GARP, but indicative of a widespread belief that a growing economy will improve the demand for energy.

Western Digital – This mid-cap technology company makes and sells hard disk drives for a wide range of computers, servers, and networks. They also make the hard disk drives for Microsoft’s X-box gaming system, one new market the storage maker is pursueing to increase revenues. S&P expects revenues to grow 24% in 2003 and 12% in 2004. In 2002 revenues increased 10% from basically flat in 2001. They are headed in the right direction, and industry consolidation should boost market share and improve the pricing environment. This stock is well-positioned when the technology sector is revitalized.

Biogen – This global biopharmaceutical company develops and manufactures therapeutic drugs for medical needs that have not yet been met, particularly in dermatology, neurology, and rheumatology. Its psoriasis treatment, Amevive, received FDA approval in January, and Avonex, for the treatment of multiple sclerosis, is its other main drug. The company recently raised their guidance for 2003 earnings, citing better-than-expected physician interest in Amevive. With a P/E/G well over 1.00 and a P/S of 4.4, the stock is a little pricey, but biotechs tend to be higher risk and therefore higher priced due to their speculative nature.

Eaton Vance – Eaton Vance creates and manages investment funds, both fixed income and equity, for institutional clients, such as pension funds and universities, and more customized baskets of managed investments in “separate accounts”, a way for wealthy individuals to own mutual fund-like portfolios in their individual accounts. They specialize in tax-managed funds, which have been profitable for them; they are now focusing on increasing their separate accounts products. Just a little pricey at $28, I would look to buy under $25.

Sharper Image – I feel I am being rather bold by adding this company after its stock price has risen about 40% since the beginning of February. And yet its fundamentals are strong—no debt, and they just finished (fiscal year ending in January) their best year ever revenue-wise. Earnings are estimated to grow 20% annualized over the next five years. This boutique retailer’s products are purchased by customers who are generally not hampered by poor economic times. With economic recovery most likely in front of us, this well-managed firm should continue to exhibit strong growth.

General Dynamics – This defense company has excellent fundamentals: low debt, a history of increasing revenues, a diverse revenue source, a return on equity of at least 17% for each of the last five years (and the last 12 months), and has increased earnings an average of 12% annually since 1992, a time in which U.S. defense spending declined. And yet it’s near its 52-week low, as are others in the defense sector since the start of the Iraq war. I don’t understand why the stock price has been so weak, but the 11% 5-year projected growth rate is why it’s no longer blue.

United Technologies – UT’s solid management team sticks to strengthening its four major businesses: Otis elevators, Carrier heating and air conditioning, Pratt & Whitney jet engines, and Sikorsky helicopters. Revenue growth was hurt in 2002 because of weakness in the airline industry, which reduced demand for its jet engines. I expect 2003 to be challenging for the same reason. Like General Dynamics, this company has a long history of strong fundamentals, and I expect they will continue to be profitable, but revenue growth may stall for the next couple quarters.

Costco has increased its revenues every year for the last ten years, and 12.43% annually over the last five years; it is estimated to grow annually at least that much for the next five. It’s no longer blue because of its 1.63 P/E/G, the result of an almost 20% rise in the stock price since February’s list. Any dip below 30 would be a buying opportunity.

Marsh & Mclennan – The stock price has increased about 12% since the February list, at which time I thought it was already a little over-priced. There is no bad news, and I am not recommending selling, but I do not view the fundamentals as GARP buy signals now.

L3 Communications – This technology company supplies sophisticated secure communication systems and specialized communication products primarily to agencies of the U.S. Government. L-3 meets all GARP criteria, and S&P expects “sales to advance a solid 17% in 2003, primarily due to new revenue generated by acquisitions.” Even with the war behind us, these are the kinds of products a strong defense budget will be earmarked for.

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. With low debt and earnings projected to grow 20% annually for 5 years, this stock is blue.

WellPt. Health Net – Even though this stock is up about 18% since being added to the list in February, it still meets all the GARP criteria. It offers a diverse mix of managed healthcare products, including an HMO, a PPO, and other hybrid plans. S&P expects premium revenues to grow about 15% in 2003 from enrollment growth. They have flexible deductible and co-pay plans, which give them a competitive advantage.

Capital One has been a remarkably profitable credit card issuer, primarily due to its information-based strategy. The company tests products, processes, and consumer behavior to guide strategy. They are currently shifting their focus away from subprime lending to the prime and superprime markets, where competition is greater, but charge-offs are fewer. Risk is inherent in a company that extends credit, but Capital One has had a low charge-off rate, indicating their research has paid off.

Lennar builds homes, primarily for first-time buyers and single families, and provides residential financial services. They have increased revenue each of the last five years, helped considerably by low mortgage rates. Although rates will increase eventually, they should remain buyer friendly for some time, and Lennar should benefit from the anticipated 15% rise in home sales in 2003. The stock remains cheap, at 7 x EPS and a P/E/G of only .48, most likely because the market just doesn’t believe that this industry can sustain the tremendous growth it has had the last few years.

Home Depot has consistently grown revenue over the years, but they lowered their guidance for 2003 to 9-12% sales growth, prompting growth investors to dump the stock. Briefing.com sums it up this way: “Briefing.com continues to think it is [a good investment] at these depressed levels given its healthy financial condition, reasonable valuation, brand equity, and still-industry leading position. The key difference now, though, is that its maturation process makes it better-suited for the value-oriented crowd.” If the 15% annualized growth for the next five years manifests, I call it GARP.