Last year, I had some extra cash that I wanted to put to work in the growth portion of my portfolio.
I use the following criteria for deciding which stocks to pick:
1. Buy what you know (be familiar with either the company or their products),
2. Solid earnings growth (15%-25% per year over the last three years is a good rule of thumb), P/E ratio not too much above the growth rate and good prospects for expansion,
3. Founder still part of management structure (has a vested interest in how the business turns out) or there is a solid management team in place with compensation not tied to short-term goals,
4. No (or little) debt (more money to spend on growth),
5. Market cap and sales < $2 billion (smaller companies tend to grow faster than larger),
6. Motley Fool CAPS rating of four or higher (sometimes you need a little help from “friends” in the investing community to confirm or deny your thesis).
This Sam is for you
One of the companies that met all six criteria was Boston Beer Co Inc (NYSE:SAM), the brewer of Samuel Adams Boston Lager.
I dove in on Nov. 19, 2012. Since then, the stock has appreciated 82%, including a 14% bounce on Aug. 1 after the company announced spectacular results the previous night, including EPS growth of 37%.
The future also looks bright. Boston Beer Co Inc (NYSE:SAM) provided an upbeat forecast for the full year. The company plans to increase its capital and R&D spending and create new brands which should fuel even more growth down the road. Things look great for the brewer barring any general economic or industry slowdown. The only caveat now is an elevated P/E of 45. Sam’s isn’t a value play, but should provide solid growth over the long-term. It’s a star in a relatively slow growth industry. I will hold onto it.
Spin-offs are usually a good thing
Another stock I picked at the same time was Virtus Investment Partners Inc (NASDAQ:VRTS), an asset management company which was spun off of its mothership in late 2008. A spin-off situation is a bonus criteria to look for. Virtus had been growing at more than a 25% rate and was expanding its operations by scooping up smaller rivals and offering new products on a regular basis. Its “founder,” CEO, and President, George Aylward, was still in charge, and the company had low debt levels. Things seemed to be clicking on all cylinders.
Since Nov. 19, 2012, the stock has also gained over 80%. The company just announced quarterly results and reported a hefty 84% gain in net income.
The fantastic performance will most likely continue. Virtus Investment Partners Inc (NASDAQ:VRTS) indicated that it will keep expanding its product offerings and anticipates net inflows into its family of funds. The company will probably not need to add any debt onto its balance sheet. Things have not changed over the last nine months. If you don’t own it already, buy the stock. I intend to stay invested in Virtus.
Are there any other companies that currently meet the same criteria that were used to pick Boston Beer Co Inc (NYSE:SAM) and Virtus Investment Partners Inc (NASDAQ:VRTS)? I re-ran my screen using a tool found on The Motley Fool site and identified two potential stocks.
Growth on the wing
Buffalo Wild Wings (NASDAQ:BWLD) operates in about 950 locations and has plans to expand even further. A combination of a casual family restaurant and a brew pub in the same building appeals to a diverse clientele. Most of its locations feature dining al fresco, which is popular with both the younger and older set during the warmer months.
The company has been growing earnings at a 16% rate and should at least keep up that pace based upon the latest SEC filings. The P/E ratio is reasonable at about 32. Buffalo Wild Wings (NASDAQ:BWLD), despite its expansion, has no debt allowing it to keep fueling even more growth. Fellow Motley Fools rate it high with a CAPS rating of four. The stock is a buy in my book and many others.
Laser focus
Coherent, Inc. (NASDAQ:COHR) makes lasers and other optical systems for industrial, scientific, and academic applications. Earnings have been growing briskly at 20% a year and the stock is reasonably priced with a P/E ratio of about 24. Available information from the company and investors indicate that the positive performance will continue.
Coherent, Inc. (NASDAQ:COHR) has a solid management team in place and no debt. Some of its products have a niche within the industry, which gives it an advantage. The Motley Fool CAPS rating is five. There doesn’t seem to be any reason not to buy it for your growth portfolio.
Conclusion
A relatively simple screen composed of six investing criteria worked well for me when I picked two stocks last year, Boston Beer Co Inc (NYSE:SAM)and Virtus Investment Partners Inc (NASDAQ:VRTS). Both companies have grown since then and share prices have exploded. And both probably continue to rate a buy.
I ran the screen again this year and identified two other companies, Buffalo Wild Wings (NASDAQ:BWLD) and Coherent, Inc. (NASDAQ:COHR), which could do just as well going forward. They appear poised for expansion and profit.
Mark Morelli owns shares of Boston Beer and Virtus Investment Partners. The Motley Fool recommends Boston Beer and Buffalo Wild Wings. The Motley Fool owns shares of Boston Beer and Buffalo Wild Wings.
The article I’m Sure Glad I Bought These 2 Stocks originally appeared on Fool.com.
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