Inside Wall Street: 2 low-risk growth stocks

Analysts see upside potential of 60% or more for TRW and Oil States even as the market hits record highs.

By Gene Marcial Apr 2, 2013 1:16PM

 Arrow Up, copyright Cory Docken, Spots Illustration, Jupiterimages

The beauty of Wall Street's ongoing rally to record levels is that it remains a market of individual stocks. The headliner big-cap blue chips haven't been dominating the leader board, but rather the lesser known, mid- to small-cap stocks. Which simply means this isn't a runaway market that doesn't discriminate between fundamentally sound stocks and risk-prone ones.


In the current market situation, some pros advocate picking seasoned growth stocks that have low to moderate risks characteristics. So analysts Michele Jensen and Kevin Downing of investment research firm Value Line have screened stocks that have such a profile: Companies where earnings have compounded at a minimum of 10% annually over the past five years and, equally important, are projected to at least maintain a 10% annual growth rate over the next three to five years.


The analysts limited the list to stocks with price appreciation potential of 60% or more, over the next three to five years. That's quite a high bar. Moreover, they excluded stocks that scored "below average" in safety in Value Line's stock-ranking system. And one other requirement: The stocks should have a financial strength rating of B+ or better.


Among the stocks that made the cut, Jensen and Downing narrowed their recommendation to two in particular: TRW Automotive Holdings (TRW) and Oil States International (OIS).


They are hardly household names, but they are hardy, proven growth stocks full of vigor and stamina. A leading supplier of automotive systems and components to global vehicle manufacturers and related aftermarkets, TRW makes such essentials as chassis systems, which account for 63% of its sales, and air bags, seats belts and steering wheels, which generate 20%. Engine valves and body controls account for 11% of sales, and electronics systems 6%.


The stock has been a winner, driving to $54 a share, up from a 52-week low of $33.40 in mid-July 2012. The bulls see the stock roaring up to the $70s in a year.


TRW, whose major customers include General Motors (GM), Ford (F), Chrysler, and Volkswagen, is "positioned to benefit from an increased focus on vehicle safety over the long term," says Jensen. She notes that demand for new products and technologies will likely increase as stricter safety standards are implemented down the line. Growth in vehicle production in emerging markets, including China and Brazil, should drive bottom-line growth as well, says Jensen.


And the company's healthy cash-flow generation and favorable cash position should enable it to accelerate stock buybacks, boosting margins and profits. TRW repurchased 5.6 million shares for $268 million in 2012, when it simultaneously cut back debt levels. "All told, we like the potential for long-term earnings growth driven partly by higher safety regulation," says the analyst.     


And then there are expectations that the company will soon reward shareholders with cash dividends. "While we think a cash dividend initiation is possible in late 2013, we think 2014 is more likely," says Efraim Levy, analyst at S&P Capital IQ, who recommends TRW as a buy. He has a 12-month price target of $71 a share.


Levy sees TRW's earnings jumping from $6.61 a share in 2013 to $7.59 in 2014, including restructuring charges.


Oil States International, which provides products and services to oil and gas companies worldwide, is a big play in the increasing global demand for fuel and natural resources. And its stock has risen to $79 a share from a 52-week low of $60.03 on June 25, 2012. It isn't too far from its all-time high of $87.63 reached in late September last year, which it certainly could exceed in 12 to 18 months.


Tubular services account for 39% of Oil States' revenues. Some 25% of revenues come from "accommodations" products, such as temporary workforce facilities, and 19% are generated by drilling, equipment and construction services. Some 17% of sales are produced by equipment used for offshore services.


Oil States provides its products and services to natural resources companies operating in many of the world's active oil and gas and coal producing regions, including the U.S., North Sea, Canada, Australia, West Africa, South America, and Central and Southeast Asia. In the offshore space, Oil States is "enjoying historically high levels of backlog," says Value Line's Downing. And the outlook for additional floating facilities is strong.


Although it can't be said that the stock isn't without risk mainly because of its exposure to North American rig counts and Canadian oil sand prices, investors "willing to take on more risk may be rewarded by the strong growth prospects of the well-run accommodations unit and rapidly increasing offshore drilling activity," says Downing. The North American rig count in the fourth quarter fell, but management expects this important indicator to stabilize soon.


This is, in part, reflected in Value Line's earnings estimate for Oil States in 2013 of $8.65 a share, which is above Wall Street’s consensus forecast of $7.40. The company earned $8.10 in 2012. So Oil States could well be a fine long-term investment bet in the oil patch.

Gene Marcial wrote the column "Inside Wall Street" for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.



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