Six Top Stocks to Buy for Real Revenue Growth in 2011

Stock trader at NYSE
Stock trader at NYSE

There's a saying on Wall Street that you can't cut your way to growth. That may be true over the long haul, but in the short term? Not so much. Just witness the ongoing V-shaped recovery in corporate earnings, where profits are soaring, but sales are not.

The fourth-quarter earnings reporting season currently under way looks pretty much like all the others since corporate profits bounced back from their nadir during the recession. Earnings are growing handsomely thanks to margin-expanding cost cuts -- not a commensurate rebound in revenue.

Analysts, on average, expect the S&P 500 ($INX) to post year-over-year quarterly earnings growth of 32% this season, according to data from Thomson Reuters. Revenue, however, is forecast to increase just 6%.

The only way a company can increase profits faster than sales is by reducing expenses, and that has some observers fretting that the days of heady earnings growth are poised to peter out.

"While companies have been producing strong double-digit earnings gains on the back of single-digit revenue growth coupled with significant cost reductions over recent quarters, further gains are limited," Jeffrey Kleintop, chief market strategist at LPL Financial, told clients ahead of earnings season. "There is little room to squeeze out additional expenses in 2011 particularly given that costs associated with materials, energy, and expanding workforces are rising."

Hunting for the High Growth Exceptions

Although the broad swath of companies comprising the S&P 500 might be putting up rather anemic top-line growth, plenty of individual names are showing signs of healthy sales gains. To see where some of the better bets on revenue growth might be found, we used data from Capital IQ and Thomson Reuters to screen the S&P 500 for companies forecast to generate annualized revenue growth over the next two years of at least 20%.

To ensure that most of this growth would find its way to the bottom line, we also looked for estimated annual earnings-per-share growth of at least 20% for the next two years. Stocks also had to trade at a forward price/earnings (P/E) multiple of at least a 5% discount to their own-five year averages (suggesting they might be bargains). And finally, we screened for "quality" stocks by locking out any name with a return on equity of less than 20%.

That left us with six companies. See the chart below.

Cliffs Natural Resources (CLF), a miner of iron and coal, is forecast to have annualized sales growth of more than 57% over the next couple of years, but most of it is front-loaded into the current period. Revenue gains are expected to cool off sharply thereafter, but shares still look like a bargain.

Chipmakers Altera (ALTR) and Broadcom (BRCM) are benefiting in part from the revolution in portable consumer electronics, which naturally brings us to Apple (AAPL). It's hardly a surprise the company is putting up great top-line results. More interesting is that Apple still trades at a significant discount to its own average forward P/E.

Shares in Celgene (CELG), the biotech that brought the world Ritalin, are down about 13% from their 52-week high, helping keep the relative valuation attractive.

And heavy-equipment-maker Caterpillar (CAT) continues to chug away on the mining and construction booms in emerging markets.

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