Time to invest in Hot Growth? – Part 1 « Enterprising Investor Forum

Time to invest in Hot Growth? – Part 1 Wednesday, September 12, 2007

Posted by ei-forum in US Traded Stocks.
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In an effort to clean out our desks, we recently came across the June 4th 2007 issue of Business Week. The cover story was Hot Growth: the 100 best small companies to watch! Here is the link to the original article: link.

Now, despite the fact that we usually shy away of the typical ‘hot growth’ stocks, we thought that it would be interesting to review this list in light of what has happen since publication and try to highlight if we can find a possible list of ‘Value Hot Growth’ propositions. We have decided to review the top 100 in two separate groups: N*1 to 50 and N*51 to 100 and as you have probably figured out by the title, we will split this post in two parts – you will be able to read Part 2 tomorrow.

The first thing we tried to do was see if any of these companies was trading at an acceptable P/E Ratio and therefore excluded all candidates that were over 10. These are the companies that made the shortlist:

Heelys (HLYS): 5.06
Mannatech (MTEX): 6.65
Grey Wolf (GW): 6.97
Unit (UNT): 7.71
Pioneer Drilling (PDC): 8.12
Eagle Materials (EXP): 9.72

Well, the first thing that stands out is that the lowest P/E stock is Heelys which already held the N*1 positioning in the Business Week ranking… but let’s drill down a bit more. Looking at the PEG Ratio and current Book Value, we have decided to take Pioneer Drilling and Eagle Material off of our short list for the following reasons:

PDC has a PEG Ratio of 6.09 and this is a bit ‘rich’ for our liking.
EXP is trading at 3.18 Price to Book and we feel the other candidates offer a better margin of safety.

All these companies are very interesting and all of them offer a valid investment thesis but for the sake of this post, we want to look at them from a different angle. What strikes us in the remaining list is that two of the companies (Grey Wolf and Unit) engage in contract oil and natural gas business and we understand this better than the sports design and retail (HLYS) and wellness (MTEX) sectors.

We feel that Mr. Market is overlooking the longterm potential of these companies and especially in the case of Grey Wolf, it seems very willing to overlook small domestic producers. With both these companies, the fundamentals speak for themselves and despite short term decrease in demand and natural gas prices: longterm need remains.