Commentary > Sivy on Stocks
Growth stocks on the cheap
Trolling for bargains after the market's rally -- 4 stocks to consider now.
November 21, 2003: 7:11 PM EST
By Michael Sivy, CNN/Money contributing columnist

NEW YORK (Money magazine) - Given the strength of the recent stock market rebound, you might expect that there would be few bargains left lying around.

After all, the Dow is up more than 30 percent from its low last March, and a fair number of companies are making the new-high list. But not all stocks move in lockstep with the Dow, shooting up as soon as a market advance takes hold.

The fact is that there are plenty of undervalued stocks still available, even among companies that offer above-average growth.

There are lots of ways to evaluate stock prices, of course. And growth investors should be looking at a stock's price relative to its total return potential rather than sizing it up based on assets or breakup value.

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To find such underpriced growth stocks, I like to scan blue chips, looking for companies whose total return potential (based on earnings growth and dividend yield) is actually higher than the P/E. A stock with a P/E of 13 would be cheap by this measure if its earnings growth was 12 percent and the stock paid a 2 percent dividend yield (total return potential can be gauged by adding a stock's projected earnings growth rate to its dividend yield).

In fact, of the companies on my Sivy 70 list of growth stocks, 10 qualify as undervalued and four look exceptionally cheap. And contrary to what you might think, these stocks are not all in a couple of out-of-favor industries. In fact, they would fit well in a broadly diversified portfolio. Here's a closer look at the four:

Anadarko Petroleum (APC: Research, Estimates) is a leading producer of natural gas and oil. Although growth projections for a company like Anadarko can only be guesstimates, the stock looks like a potential winner from three different perspectives.

First, the company offers above-average growth in a slow-growing industry. Largely because of higher prices for natural gas, earnings for the most recent quarter were up 45 percent and Anadarko raised its dividend by 40 percent. The stock's second attraction is that its P/E is so low -- less than 10, based on expected earnings of $5 a share for the current fiscal year. And finally, like all energy stocks, Anadarko offers a long-term hedge against a revival of inflation.

MBNA (KRB: Research, Estimates) is a leading issuer of credit cards in the United States, especially those that are linked with various kinds of organizations, from alumni societies to animal-welfare groups. This extremely lucrative business has propelled MBNA's earnings growth at a 20 percent compound annual rate over the past five years.

Nonetheless, the company's success has been a bit overshadowed by investor fears that consumer spending might falter. But now that an economic recovery seems to have taken hold and job creation is improving, the credit-card business -- and the stock's 14 percent projected growth rates -- may start looking more secure. In the meantime, the stock appears cheap at less than 12 times next year's estimated earnings of just over $2 a share.

Union Pacific (UNP: Research, Estimates) operates the largest U.S. railroad, serving primarily the western two-thirds of the country. Since an enormous amount of freight is shipped by rail, Union Pacific is a perfect stock for any investor who believes in Dow Theory -- specifically the notion that any genuine bull market will have a move in transportation stocks confirming the one in industrials. Indeed, railroads report that cargo volumes are up significantly in the fourth quarter.

Moreover, to improve its finances, Union Pacific recently sold its trucking business to raise $610 million that will largely be used to pay off convertible preferred borrowing. Yet despite this positive outlook and above-average projected growth, the stock trades at only about 13 times 2004 earnings.

Washington Mutual (WM: Research, Estimates) is a Pacific Northwest lender offering diversified services to individuals and small to mid-size businesses. Historically, a significant share of the company's business has come from mortgages and commercial real estate loans.

Over the past few years, the bank has opened hundreds of branches across the country -- and it appears that this expansion can continue for many years. In addition to a 12 percent projected earnings growth rate, the stock yields a hefty 3.5 percent, thanks to 33 consecutive quarters of dividend increases. Yet the shares trade at a bargain P/E below 10, based on next year's earnings.

Michael Sivy is an editor-at-large for Money magazine. Sign up for free e-mail delivery of Sivy on Stocks every Tuesday and Thursday.  Top of page

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