Most savvy stock market investors tend to fall into one of two groups: growth investors, or value investors. Growth investors favor companies whose revenues and profits are experiencing rapid growth. These are usually less mature companies that are still in the high-growth phases of their existence. As a result, growth investors more often than not favor smaller companies that don’t pay dividends. Instead, they reinvest their profits back into the business, to ensure the days of high growth continue unabated.
Value investors, on the other hand, prefer to seek a meaningful margin of safety from their equity investments. Followers of this philosophy rely on the teachings of the fathers of value investing, namely Benjamin Graham and Warren Buffett, who preach the critical task of purchasing stocks for less than their intrinsic value. Low price-to-earnings and price-to-cash flow ratios are commonly used analysis tools for the value investor.
Finding common ground with 3 great stocks
While most stocks tend to display characteristics of one or the other group, nevertheless, with a little bit of due diligence, it is indeed possible to find such stocks that display characteristics found among both growth and value stocks. For example, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) seems to fit the bill. Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is a search engine giant and is commonly referred to the Google of China. Whereas Google trades for a trailing price-to-earnings ratio of 25 times and holds a market value in excess of $260 billion, Baidu.com, Inc. (ADR) (NASDAQ:BIDU) is a much smaller rival with a more attractive valuation profile. Shares of Baidu.com, Inc. (ADR) (NASDAQ:BIDU) were hit hard over the last year, falling from $150 per share to its current level of $88 per share, and as a result, the stock currently exchanges hands for only 18 times earnings, yet has a growth trajectory befitting a higher valuation.
The market was especially concerned over the company’s most recent earnings report, even though the underlying numbers looked very solid. Total revenue increased 42% in the fourth quarter and 53% for 2012, year over year. Furthermore, fiscal year 2012 net income increased 58% from 2011.
Unfortunately, even those kinds of growth rates weren’t enough to stop the stock from falling 10% on the day of the earnings announcement. Interestingly, little in the earnings report implied that the company’s growth is slowing down. The company expects growth to continue, at least for the near future. Baidu currently expects to generate total revenue ranging from $945 million to $975 million for the first quarter of 2013, representing a 38.1% to 42.6% year-over-year increase.
Another stock struggling against the market’s seemingly irrational expectations is Dollar Tree, Inc. (NASDAQ:DLTR), which has been besieged lately as the market worries about potential headwinds to the company’s customer base, including the payroll tax hike and possible spending cuts. Because of these concerns, Dollar Tree has lost 15% of its value since last June, leaving the stock trading at a trailing P/E ratio of 17 times.
Meanwhile, Dollar Tree executed very well last year, despite the stock’s struggles. Total revenue climbed 11.5% in fiscal 2012, and are up almost 60% since 2009. Moreover, the company’s diluted earnings per share rose by a full third in fiscal 2012, year over year.
