McDonald's, 4 other stealth growth stocks

Investors tend to look for the 'next big thing' to find rapid growth. Stealthy growth firms offering common products like hamburgers and cigarettes often get overlooked.

By MSN Money Partner May 29, 2012 1:14PM

By Elizabeth O'Brien for SmartMoney.com

 

There's nothing innovative about a hamburger. No matter what a chef does to one, it's still a slab of beef and some condiments nudged inside a bun -- a product that's been around since at least the late 19th century. SmartMoney.com

 

There's nothing particularly sexy about a fast food joint that sells those burgers either -- or for that matter, a makeup manufacturer or a water utility.

 

But while the stock market buzz is ever focused on companies that make and sell the next big thing, some pros say investors can do well by selectively buying up shares in businesses that do boring stuff -- but whose sales and profits are quietly rising from quarter to quarter.

 

Call them "stealth" growth stocks, companies that have a steady history of expanding, even though they offer a product more likely to be found at, say, a truck stop than at Best Buy (BBY). Typically, the firms who make and sell such everyday things (known as consumer staples) or that distribute essentials like power or water (utilities) tend to be more recession-resistant, so it's no surprise that investors flock to such stocks when times are tough.

 

But with the economy now regaining steam, both of these groups, on the whole, are being ignored, as sectors like financial services, information technology and consumer discretionary (each up by at least 17%) tear up the Street. And that long-term pattern, say analysts, might offer investors an opportunity.

 

For while those workaday stocks "are easy to dismiss," says Michael Sansoterra, lead manager of the $317 million RidgeWorth Large Cap Growth fund, they contain some under-the-radar rockets.

 

For the most part, such stealth growers have been boosting profits -- not by trimming costs, but by selling more stuff (often at higher prices). For instance, sales at cosmetics company Estée Lauder (EL) are up 13% over the past year, an impressive feat, analysts say. The double-digit sales growth in its skin-care line, moreover, is a particularly good sign, says Sansoterra. "When you get a company that can do that," he says, "it doesn't matter that it's a staples company." Investors should look for firms that can grow at a faster rate than their sector peers, regardless of how their stocks might be labeled, says Brian Jacobsen, chief portfolio strategist of the Wells Fargo Advantage funds, which manages $213 billion.

 

Some of these familiar names wind up strong long-term performers as well. McDonald's (MCD) stock, for example, is down nearly 10% in 2012, but its five-year history tells a different story: Shares of the burger behemoth have returned nearly 104% after dividends -- the broader market, down 4%. Margie Patel, senior portfolio manager of the $533 million Wells Fargo Advantage Diversified Capital Builder fund and a shareholder, likes how the chain has added specialty coffee and other menu items, all of which helped boost sales 12% in 2011 over 2010.

 

But experts say investors can't just jump on every burger chain and makeup maker. Sansoterra says he winnows the list by focusing on companies that generally exceed investors' sales and profit expectations. He also favors firms that either offer a product or services that shake up their markets or that can benefit from long-term trends, such as the growing affluence of consumers in developing countries. Indeed, success abroad has contributed to strong sales growth at Estée Lauder, which gets more than half of its sales from abroad.

 

John Osterweis, meanwhile, says he has found his stealth growth on the big screen. The chief investment officer of Osterweis Capital Management likes Cinemark (CNK), a movie-theater operator in Plano, Texas. Competition from firms like Netflix (NFLX) has convinced investors that the movie-theater business is "at best mature and at worst dying," he says, yet the company is posting mid- to high-teen sales growth in Latin America.

 

Here are five examples of companies growing profits quickly -- in sectors not known for runaway growth.


Philip Morris International

Cigarette manufacturer Philip Morris International (PM)  (spun off from the Altria conglomerate in 2008) gets all of its revenue from overseas. The company's ability to raise prices on its popular Marlboro brand, analysts say, contributed to its 14% sales growth in 2011, compared with the year before.

 

McDonald's

More than 80% of the Golden Arches are owned and operated by franchisees, a "wonderful business model" that keeps the cash rolling in to the Oakbrook, Ill., company, says Bill Vogel, the CEO of Montag & Caldwell, which manages $14 billion and is a shareholder. McDonald's (MCD) stock also pays a 3.1% dividend.

 

TW Telecom

This Littleton, Colo., telecom is gaining market share from bigger rivals through more-attentive customer service, says Donna Jaegers, senior analyst with financial-services firm D.A. Davidson. She predicts that the TW Telecom's (TWTC) "momentum over the next few years" will justify the valuation of the stock, which trades at 39 times 2012's estimated earnings.

 

Estée Lauder

Consumer-staples firms often have trouble cutting costs because many lack pricing power. But the New York-based cosmetic giant Estée Lauder (EL) has done a "stellar job" of communicating the value of its skin-care line, leading to price increases and double-digit profit growth, says Michael Sansoterra, lead manager of the $317 million RidgeWorth Large Cap Growth fund.

 

American Water Works

Investors don't normally associate highly regulated businesses with strong growth, but the Voorhees, N.J., water utility is an exception, says Matt Berler, the president of Osterweis Capital Management. American Water Works (AWK) has gotten aggressive about approaching state utility commissions for rate increases, and Wall Street's earnings estimates for the company are "consistently too conservative," Berler says.

 

More at SmartMoney.com:

 

Why a "balanced" portfolio may not work

Best and worst brokers of 2012

European bank stocks: Contrarian or crazy?

1Comment
May 29, 2012 1:40PM
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Except for MCD and PM, those are smaller companies with significant risk.
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