With U.S. stocks hitting record highs, investors face a question of where to invest. True, that's always THE question -- but this market isn't an ordinary one.
Expectations for monetary easing have largely been behind the recent market strength (up nearly 10% since the beginning of June). That's unusual for a market trading at all-time highs, but these expectations have been all but confirmed after Congressional testimony last week from Federal Reserve Chairman Jerome Powell.
While investors await the next earnings cycle (which gets underway this week) for more clues about the direction of profits and the economy, Chairman Powell's words are the basis of their near-term bullishness. But stocks have gotten expensive, and many growth stocks -- the ones we invest in over at Fast-Track Millionaire -- look reasonable only if their fast growth remains intact.
In these conditions, it would be wise to also consider somewhat slower-growing and/or better-valued stocks. If you agree, then this screen is for you...
How to collect checks for $1,278. $3,225... and even $8,760
Let's Hunt For Stock Market Bargains
In order to not veer too far from our goals at Fast-Track Millionaire, I started my search in the small-cap universe, considering only stocks larger than $500 million but smaller than $2 billion in the market capitalization. Next, I applied a valuation metric to these stocks: enterprise-value-to-EBITDA (EV/EBITDA).
EBITDA takes into account earnings before non-cash and some mandatory cash expenses -- that is, earnings before interest, taxes, depreciation, and amortization. Compared with the company's enterprise value, it is a useful metric for determining a stock's underlying value.
This is a metric we don't normally focus on at Fast-Track Millionaire, so an explanation is in order...
Calculated as the company's total market value (that is, adding total market capitalization, preferred shares and minority interest), enterprise value (EV) also adds the total value of the company's debt and subtracts its total cash. This way, the EV metric encompasses the entire worth of the company's business and is, in fact, the closest to how the company's business is valued in a takeover consideration.
Similar to the price-to-earnings (P/E) ratio, the EV/EBITDA measure also varies across market sectors. Also similar to P/E, lower readings for EV/EBITDA indicate value. And, just as with P/E, analysts often view EV/EBITDA that is too low with suspicion.
With this in mind, I set a range of 10 to 20 for my EV/EBITDA metric. And to make sure a company is profitable or on its way to becoming profitable, I selected only those companies that generate a positive cash flow.
The envelope, please...
Data as of July 12, 2019
America's Car-Mart is, in essence, a marketplace for older cars and a business to finance them. Selling at just under 12 times EV/EBITDA, it's significantly cheaper than the average of 15.7 for its peer group (a group that includes CarMax (NYSE: KMX) and AutoNation (NYSE: AN), which trade at 36.2 and 11.7 EV/EBITDA, respectively).
America's Car-Mart has recently taken a few significant steps to digitize the business and simplify the customer experience, having rolled out an online credit application app and getting closer to rolling out a digital inventory list, expected by the first quarter of 2020. That the company is opening new dealerships (two were opened in the latest quarter) also speaks volumes about its growth prospects. With 144 dealerships in 11 states (Alabama, Arkansas, Georgia, Indiana, Iowa, Kentucky, Mississippi, Missouri, Oklahoma, Tennessee, and Texas) located mostly in smaller towns, more than 75,000 active accounts and a focus in the "Buy Here/Pay Here" segment of the used car market, CRMT is poised to benefit from its own financial strength in a largely fragmented market.
Founded in 1965, Cavco Industries develops residential modular structures. With a set of brands that includes Cavco, Fleetwood, Palm Harbor and Fairmont, the company offers manufactured homes, modular homes, park model RVs and cabins and commercial structures, as well as mortgage lending and insurance.
Cavco had just three manufacturing facilities in six states back in 2009; today, it has 20, serving 44 states and Canada. Commanding a 13% market share, Cavco has room to expand. Analysts expect CVCO's profits to grow at a 22.5% pace for the next few years. This homebuilder fully qualifies as a growth stock, and it should stay on any growth investors' radar.
Virtusa is an information technology consulting company. Its offerings include business process management, application services, infrastructure management, enterprise information management, independent validation services, platforming, mobility, enterprise resource planning, business consulting, customer experience management, and the cloud.
In just-ended fiscal 2019 (reported May 15), VRTU generated $1.25 billion in revenue, a 22% growth over 2018. The company posted $2.12 in non-GAAP earnings per share (a 30% growth over last year), and improved margins by 140 basis points.
Analysts expect the company to continue its rapid growth, and believe it will be able to deliver a 20% annual profit increase over the next few years. Set to benefit from growth in technology and the need for qualified specialists, Virtusa has all the makings of a growth stock for a long haul.
Action To Take
As always, remember that while stock screens like this are certainly valuable, they are not a substitute for good old fashioned research. So if you think any of these ideas has potential, then I recommend you investigate further before buying.
And if you're looking for more growth stock ideas, then I highly recommend you check out my Fast-Track Millionaire premium newsletter service. After all, if your goal is to find stocks with triple-digit-plus potential, then you stand a far better chance with my research staff and I in your corner. In fact, I'd like to show you my latest research right now to give you an idea of what we have to offer. To learn more, go here.