Top 5 Growth Stocks | Investing for Solid Long Term Gains

We’ve had a huge rally since the march lows, and my current stance is that we should see the collapse of this massive bear market rally any day now.  That being said, prices on some stocks are low enough that given their growth potential, you’d probably do fairly well for yourself even if you bought now, near what is likely the high of this bear market rally.  Of course, you may be able to do better by timing your entry, waiting for a pullback in the major indices before pulling the trigger, but for the more long term investor, now is as good a time as any.

To find these companies, I used a combination of fundamental and technical criteria, searching for the best companies in a decent technical position.  Here are the companies I uncovered.

1.        Research In Motion (RIMM) - $83.45 per share

I talked about THIS one extensively in a prior article.  Its up a couple percentage points since then, but hasn’t encountered any big movement yet.  What it comes down to is that this company is fundamentally strong; it has a good debt position, it has strong revenue and earnings growth, and the company has a large cash position.  It basically has everything I look for in a company, and is trading at a PE multiple of about 25.  I see the multiple going to 30-40 after the recession, on top of much higher earnings, so this stock is definitely going up in the long run.

2.        Shanda Interactive Entertainment (SNDA) - $63.32 per share

This company deals in the Chinese online gaming market.  I’m sure you’ve heard in one newsletter advertisement or another that china is big, and you may even have read them talk about the gaming industry over there.  Although I wasn’t trying to target Chinese Gaming specifically, this did come up in my stock scan.  Here we have another strong company.  First off, this company has almost no debt.

Second off, comparing the latest quarter to the one a year ago, they had revenue growth of 42%, and earnings growth of 34%.  Pretty spectacular given the generally lacklustre earnings most companies are getting lately.    Finally, they have the advantage of being in China, where the economy is still growing, and so demand for their products is increasing, instead of going down.  For the low PE multiple of 23, this stock could easily take off to much higher levels in the coming years.

3.        Netease.com, Inc. (NTES) - $38.10 per share

Have you ever noticed that when one company is doing well in an industry, others in the industry also tend to succeed?  Its because conditions in the industry broadly help many companies do well, and perhaps that explains why this company made the list.  This company also deals in the Chinese online gaming market, and product-wise, is very similar to Shanda, number 2 on our list.  Also a company with very little debt, its revenue growth numbers came in at a paltry 20% comparing this quarter to the one a year ago, although earnings were actually up 55%.  With no debt to speak of and a growing market, I can’t really see any serious impediment to this company’s success.  Its currently trading at a PE multiple of just 19.  Like the other companies on this list, I think you can make a killing if you hold it for a while, as people will eventually see a company that’s growing earnings at a lightning fast clip, and give it a PE multiple of at least 30.  Factoring in the ever increasing earnings and this could easily double or triple in the coming years.

4.        Transcend Services Inc (TRCR) - $13.30 per share

This is likely a company you’ve never heard of.  With a market cap of just 113 million, it’s a very small company.  As google finance puts it, they “provides medical transcription services to the healthcare industry”.  To be honest, I’m not 100% sure what exactly that means.  What I do know is this; Sales in the most recent quarter vs that quarter a year ago were up 28%.  Earnings were up 18%.  They’re in the healthcare industry, so they won’t get hit by discretionary spending issues if the consumer gets beaten too hard by the recession.  They have very little debt, with a debt to equity ratio of just 2.35%.  They also trade with a PE ratio of just 19.  Given they’re strong revenue and earnings growth, and their healthy debt situation, I wouldn’t be surprised if that increased to 25 in the near future.  As the economy recovers, and hospital budgets go up, its entirely possible that they’re earnings and revenue growth will accelerated, and they’ll do even better then that.  I like to play it by the numbers, and the numbers say this is a solid company to be buying into.

5.        SOHU.com Inc (SOHU) - $69.26 per share

Once again, we’re back to china and the internet.  As google finance puts it, “Sohu.com Inc. (Sohu) is an Internet company in China, providing Chinese with news, information, entertainment and communication [...]Its advertising business comprises brand advertising and sponsored search services. Sohu’s non-advertising business principally includes online games and wireless value-added services.”  This is startlingly similar to numbers 2 and 3 on the list, and just goes to show you how strong this industry is.

My stock screener came up with 8 companies total, 3 of which were trading OTC.  Of the remaining 5, 3 of them were in the Chinese gaming industry.  Amazing.  In terms of the actual company, its a familiar story.  Sales up 37%, earnings up 108%, and no long term debt.  A company like this should fairly be trading at a PE multiple of 30 right?  In my wildest dreams, perhaps just 20, offering an absolute monster of an investment likely to deliver fantastic returns.  Yet sometimes fact is stranger then fiction.  This company is trading at a PE multiple of just 14.84.  For a company that operates in a growing market, with growing revenues and earnings, and no debt, that’s an amazing deal.

So those are the 5.  Research in motion, Shanda, Netease, Transcend Services, and Sohu.  What are the important trends here?  For one thing, 3 of the 5 are based in china, and part of the Chinese gaming industry.  This may be because I was screening for companies that increased revenues year over year, and china’s economy didn’t slow - it merely grew at a slower pace.  That being said, it still points strongly to china as a good place to invest.  These are also all traded on the NASDAQ, which has been outperforming of late.  Perhaps this is a good demonstration as to why?

So those are the 5 growth stocks I’d buy and hold, based on a pure-by-the-numbers approach.  The recession hasn’t slowed down these companies, as growing revenues and earnings have demonstrated.  Yet the recession has taken down their stock price, giving opportunistic investors a great entry price.  While we’re likely approaching the end of a bear market rally, these companies should hold up better then most in a downturn, and should produce returns far in excess of the market should it continue going upwards.

Of course, if you want to supercharge your returns, you could use a long term option strategy like the one mentioned in one of my older articles on stock option strategy…