A rising market and a still-slow economy have created a real conundrum. Should you focus on the increasingly smaller group of deep-value stocks, or should you step on the gas, searching for stocks that are set for very strong profit growth in the years to come?
I've excluded commodity stocks from the list. Who knows where oil, gas, copper or steel prices will be a year from now? If the underlying commodities fall in value, then there's no way these kinds of stocks can boost profits sharply in 2013.
I've also sorted out housing stocks from the group and put them in the table below. These stocks may boost profits sharply in coming years -- if the housing market picks up. And that's still a big "if."
On the bigger table later in this piece, you'll also WY) and Potlatch (NYSE: PCH). Each of these firms is in the timber business and would surely benefit in the eventual upturn in new home construction.Weyerhauser (NYSE:
I also sorted out technology stocks from the group. These companies are hoping for strong demand in 2012 and 2013, as IT budgets continue to slowly open up. Many corporate networks, along with global telecom networks, are being upgraded with the fastest chips and switches, which may be a boon for these companies, as you can see in the table below...
It's hard to spot a clear theme in the remaining stocks in this group. Profits are expected to rise at a fast pace on the heels of market-share gains, rebounding industry demand or financial engineering that is yielding margin gains.
A pair of stocks book-ending this table are also members of my $100,000 Real-Money Portfolio (Sign up here -- free for a limited time). Zipcar (NYSE: ZIP) and Cree (Nasdaq: CREE) appear set for solid top and bottom-line growth, though investors should brace for bumpy quarterly results on the path to firmer annual results. [Go here and here to view my original take on these stocks.]
You'll also spot Fuel Systems (Nasdaq: FSYS) on the list. Though the stock is up 33% since I recommended it three weeks ago, it still has a lot more upside if natural gas-focused legislation is enacted this year.
K12 (NYSE: LRN)
This company finds itself right in the middle a major national debate about our nation's academic standards and costs. The current education system has been characterized by high costs and poor test scores, which is why former President George W. Bush and President Obama have sought to shake things up through new systems of rewards and penalties to boost academic results.
K12 appears to be something of a solution to the problem. The company has developed an academic curriculum -- taught for home-schooling and charter schools -- that costs roughly 30%-40% less per student to administer than traditional public K-12 classrooms. It's not simply a path to cost-cutting: "Evidence suggests, year after year, virtual schools using the K12 curriculum continue to outperform on state test results, academic performance improves with tenure and more students are being accepted to top-tier colleges like Cornell, Princeton, Berkeley, Stanford, Michigan and Duke," note analysts at Barrington Research.
Parents and educators are surely taking note of K12's impressive results and costs. Enrollment surged 46% in the December quarter to 144,000 students compared with a year earlier. Revenue is expected to rise from $522 million in 2011 to nearly $700 million this year and more than $800 million by 2013. That's leading to robust profit gains as well, as noted in the table above.
Shares took a big hit in mid-December when The New York Times questioned the merits of the company's business model, citing concerns that the for-profit approach has undermined the quality of education. This has not led to any further scrutiny of the company's business model thus far, but there is a risk that legislators will eventually examine the company's claims of superior testing scores.
That concern aside, Merrill Lynch says the company has "significant top-line growth potential without taking into account expansion into new states." Their $30 price target is roughly 40% above current levels. Barrington Research's analysts are more bullish, predicting shares could rise to $35, noting that at less than nine times projected 2012 EBITDA, shares trade at a discount to similar stocks, despite the fact that K12 has superior projected growth rates.
Risks to Consider: These are all high-growth business models carrying high expectations. A weak quarter could cause shares to tumble.
Action to Take --> When searching for growth stocks, it's best to focus on companies with an extended runway, capable of several years of sustained growth. Many companies in the tables above appear to fit that bill and should be a fertile ground for further research into potential buys.