GROWTH AT A REASONABLE PRICE (GARP)
Growth investing has changed: the 10%+ annual growth rate stocks achieved before 2000 has changed to negative returns the last three years, and the technology sector is not only no longer the leading growth sector, it has seen the biggest losses. The fear of losing money (again) provides a formidable resistance to new investing. On the other hand, the miniscule money market rates and the low yields offered by fixed income products (bonds, treasuries, CDs) practically force us to find growth by investing in stocks.

I am convinced that technology will again—maybe in the next year—exhibit better than average growth and that there are growth companies to invest in now. The key is to find companies that have good growth prospects, are not risky, and are not over-priced: growth at a reasonable price (GARP).

Accordingly my current list of Growth Stock Recommendations emphasizes low debt, increasing revenues, and reasonable prices, in addition to the mandatory good growth outlook. While I like all of the companies on the list, those stocks highlighed in blue satisfy all of the GARP criteria (details below), and are the most attractive now.

Although past results are no guarantee of future performance, they are the only certain data we have for judging a company’s strength and a management’s credibility. I have included the traditional measures: the 52-week price range, earnings per share (EPS) for the most recently reported year, and the current P/E (price divided by earnings per share).

Linda Stewart for www.fizone.com

December 16, 2002

Cisco has a stellar past of dominating its industry and increasing revenues—until last year when revenues declined. Demand needs to materialize and increase sales, as its P/S indicates it is currently over-priced. Evidence of increased demand would signal the time to buy Cisco.

Comcast's approved merger with AT&T Broadband should strengthen the company in the long run, making it the Goliath of cable; but it will increase its debt load and bring in AT&T’s “dysfunctional management” (Morningstar 10/28/02). Hopefully Comcast’s top-notch management team will prevail, continuing its generation of cash flow and increasing revenues.

Flextronics's future looks bright, but it depends on a rebound in technology in general. They are an electronics contract manufacturer, which should get a lot more business from original manufacturers that want to cut costs by contracting out production. They are probably the best positioned in their sector to handle large deals when general demand picks up.

ADP's P/S suggests it is a bit pricey, but it has no debt, and its revenue history is awesome: 41 straight years of double-digit EPS growth. Like Flextronics it should benefit from the trend to contract out, in this case payroll processing.

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.

Citigroup is one of the most diverse financial services companies; it’s successful at cross-selling its services, which has allowed it to increase its EPS by 14% in the first nine months of 2002. Its diversity has also led to diverse catastrophes: dealings with Enron, conflict of interest with its investment banking analysts, exposure to Latin America.

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 (like Citigroup), but it is a solid company worth keeping an eye on.

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.

WalMart has demonstrated exceptional ability to grow revenues year after year, and there is no reason to believe that won’t continue. At its current price, it is a bit over-valued.

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.) continue prospecting for new oil sources.

Since this was the first list of growth stock recommendation, there were no added stocks to report in this section. All stocks are either Blue List or non-Blue List recommendations.

Since this was the first list of growth stock recommendation, there were no stocks removed from the Blue List to report in this section. All stocks are either Blue List or non-Blue List recommendations.

Since this was the first list of growth stock recommendation, there were no removed stocks to report in this section. All stocks are either Blue List or non-Blue List recommendations.

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.

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.

Costco has increased its revenues every year for the last ten years, and the just-reported quarter’s revenue grew by 8.6%. The strength and consistency of their growth, especially in the currently tepid economy, is remarkable.

Home Depot has grown revenue an annualized 15% over the last five years, but has been struggling with sales growth this year. The stock price has weakened so much that there is plenty of upside to Morningstar’s fair value estimate for the company of $36.

General Dynamics If you don’t mind investing in a defense company, this one has excellent fundamentals, such as year after year of double digit returns on equity, long-term contracts with the government, and they will most likely benefit from an increase in defense spending.