5 Growth Shares For A Bull Market

Published in Investing on 27 February 2012

Looking for growth shares at times like these? Oh yes.

Convinced as I am that we are heading into better times for stock markets, and that the time will soon be ripe for growth shares to emerge once more from the gloom, I've turned back to one of the very first investment writers I ever followed -- Jim Slater, and his famous PEG ratio.

The PEG divides a company's prospective price to earnings (P/E) ratio by its forecast earnings per share (eps) growth, looking for low values that suggest the price has some rising to do. Jim Slater looks for a value of 0.7 or less.

Filtering for such low PEG shares, I've uncovered a few promising candidates. Dividends don't usually figure in growth share searches, but I've included them in the following table because, well, we'll see...

CompanyP/Eeps growthPEGDividend
Chemring Group (LSE: CHG)7.524%0.33.7%
Volex (LSE: VLX)8.922%0.40.2%
Aberdeen Asset Management (LSE: ADN)13.726%0.54.0%
Wm Morrison (LSE: MRW)10.115%0.74.1%
Hilton Food Group (LSE: HFG)9.514%0.74.7%

(Morrison and Volex are near the end of their year, so figures are from 2013 forecasts, others are 2012)

What do these companies have in common? Not a lot really, but I think it shows how useful the PEG ratio can be even in times when it uncovers more than just traditional growth companies.

Recovery indicator

The aerospace and defence engineer Chemring is a good example. In a sector that is out of favour, largely due to government cutbacks, it has seen its share price fall all the way from over £7 to around £4.30, even though earnings are still growing and forecasts are strong for this year and next.

The fallen share price brings us a PEG of only 0.3 for the year ending October 2012. And the reason I included dividends in the table -- it's offering a decent 3.7% yield that's thrice covered by forecast earnings.

Is Chemring oversold due to bearish overreaction? It might well be.

Food sellers?

And yes, we have Wm Morrison coming through a growth filter! But that's not as surprising as it might seem, as Morrison has been growing its profits quite nicely over the past few years, and with 15% earnings growth forecast for January 2013, it looks like it's profiting nicely from the stumble that Tesco (LSE: TSCO) seems to have taken of late.

With the price having moved just about nowhere over the past 12 months, it could be a good time to buy now at 290p.

We also have Hilton Food Group, which is in the perhaps unglamorous business of making wholesale meat packaging. Although it has been up and down a bit, the share price has doubled since early 2009 to the 265p level today, while profits and dividends have been steadily growing. At £185m, it's a small cap company, with modest year-end debt in 2011, and another strong year forecast.

Real growth

Talking about unglamorous, Volex makes cables -- power cords, fibre optic cables, and stuff like that. It might not sound exciting, but it's a very profitable business. Volex, which does half of its business in Asia, has been growing its profits strongly. It's another small cap company with low debts, and has a good 2012 expected with further strong growth pencilled in for 2013.

It's more of a classic growth story, with the company's first dividend expected this year, which ends in March, and that should hopefully be the start of regular payouts. And though the share price rose strongly to top 370p early in 2011, it has fallen back to around 250p now.

Invest in investment

Perhaps the best prospect of these five lies with Aberdeen Asset Management, which provides a range investment funds, and services for professional investors. The share price slumped during the financial crisis, but has recovered pretty strongly since. Over the past 12 months, it has soundly beaten the FTSE, but it may well have further to go -- and it has dropped back slightly from its recent peak, to 247p.

For the year ending September 2012, the City is expecting to see a 25% rise in earnings per share, with a further 15% or so forecast for the following year.

There was net cash on the books last September, and again, it's paying a good dividend too of around 4%, which is well covered.

Bullish or bearish?

So what does all this tell us? For me, one thing it shows is the unexpected results we can get when we run filters to look for specific kinds of shares.

But more importantly, when I see good dividend-paying shares with strong forecasts ahead of them and their prices so low that their PEGs fall to growth share levels, that tells me that we're in bargain share times and we should make the most of it.

I wouldn't rush out and buy any of these shares just on this, of course -- this is only the pick of my first screening. But I do think they're worth further research. 

More from Alan Oscroft:

> The Motley Fool owns shares in Tesco.

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Comments

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zoolook 27 Feb 2012 , 1:16pm

Hi Alan

Where do you get the 15% EPS growth figure from for Morrisons? The consensus figure on digitallook is 10%

Cheers, Simon

motivefinder 27 Feb 2012 , 9:48pm

well, how come on earth, you comparing a UK national retailer with 12.4% market share trading at 290p, with world 3rd largest reatiler (with UK Market share of 29.9%), which will be benifitted from emerging markets where growth rate is about 8% and also from US recovery --trading at 318p ?
Its simply no brainer?

TMFBoing 28 Feb 2012 , 9:12am

Hi Simon,

Where do you get the 15% EPS growth figure from for Morrisons?

I got it from REFS, which has 9% for Jan 2012 and 15% for Jan 2013 (as I noted, I used the 2013 figure, as 2012 is already over for MRW). The Fool's Digital Look forecasts have 10% for 2012 and 12% for 2013...

http://www.fool.co.uk/caps/quote/mrw/forecasts.aspx

I guess different sources include different forecasts, and are probably different in terms of how up to date they are.

And that's a good reminder of how we shouldn't place too much faith in forecasts (some would say none at all) and only use this kind of filtering as a first step before doing some proper analysis.

But I still think MRW looks cheap ;-)

Foolish best,
Alan
TMFBoing

fishy12 28 Feb 2012 , 1:47pm

Morrison's do not have the International Market that Tesco has, and there drop in share price is based on a bad period over Xmas,I'll put my money on TESCO .With Warren Buffets blessing (he thoroughly analyses all his purchases) i feel confident in share price appreciation and a reasonable divi while i wait.

bouleversee 28 Feb 2012 , 5:02pm

I wonder what Jim Slater was doing with his PEG when he lost my entire investment in Slater Walker Growth Fund (or might have been Trust; too long ago to remember).

abecol 28 Feb 2012 , 7:19pm

I feel PEG is a very good measure. However, I think it should be based on ACTUAL results rather than forecasted eps. They are usually wrong especially when their PEGs are so low.

Jim Slater started something very good but it is up to Share Advisor to improve it.

abecol 28 Feb 2012 , 7:23pm

Is it possible for Share Advisor to recast the five shares with the actual eps figures for 2011/12 year end? It would be very very interesting!

Summerwood 28 Feb 2012 , 10:47pm

Hilton Foods is a nice defensive stock to tuck away but it yields 3.96 % at today's price of 2.653 (final dividend 7.4p interim dividend 3.1 p) not 4.7% as you suggest above

TMFBoing 29 Feb 2012 , 3:07pm

Hi Summerwood,

For PEG purposes I'm using the forecast dividends for 2012. Forecasts at REFs suggest 4.77% (which I rounded down). TMF's Digital Look currently has 4.8%...

http://www.fool.co.uk/caps/quote/hfg/forecasts.aspx

Foolish best,
Alan
TMFBoing

motivefinder 03 Mar 2012 , 1:02pm

you will make 20% profit in a year time with tesco at todays price plus ongoing dividend.

motivefinder 03 Mar 2012 , 1:05pm

some people just forgetting fundamentals --tesco is an international player, uk market share of 29.7% , morrison national player only , uk market share of 12.2%,
even considering uk only market share, tesco should be double the price of morrison, we will see tesco above 500p in 1.5 year time.

spyknife 23 Apr 2012 , 1:20pm

Just bought 500 chemring shares at £3.58 each.If in 6 months time (23rd October 2012) I am not in profit.I will quit investing forever.

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