Growth stocks should be where you make the money. Find an exciting story and watch your nest egg gro...
Growth stocks should be where you make the money. Find an exciting story and watch your nest egg grow. Last year, of course, quality growth stocks looked rarer than hen's teeth. Now they are starting to poke through, boosted by low valuations and reductions in interest rates.
But it is not easy for the individual investor to track down the next big growth story, especially at a time when the sector as a whole is dampened by economic uncertainty and profit warnings.
To follow are 10 of the top growth stocks in Europe recommended by Wall Street Journal Europe.
First, 15 professional fund managers were consulted for an initial screening of growth stocks. To qualify for a closer look, stocks had to have been recommended by at least two fund managers. This cut the list from about 50 to some 20 stocks. That short list was thinned out to a final 10 recommendations of those European stocks that should outperform the market over the next two years.
The recommendations start with steady growers such as French pharmaceutical group Aventis and move on to buys in European financial services as a play on the rising equity culture and pension reform.
From downtrodden stocks such as LM Ericsson the list ends with the higher-growth, higher-risk software services.
To qualify, companies must have expected earnings growth in 2001 of at least 15% although many should hit 50% in subsequent years.
Aventis: healthy numbers
Looking for something safer than technology and with steady growth? Try a dose of pharmaceuticals in the form of France's Aventis. It's growing faster than its competitors yet trades at around a 14% discount. Cost-cutting and blockbuster drugs in the pipeline have all put the group in robust health.
"For the first time Aventis has visible top-line growth," says Duncan Moore, analyst at Morgan Stanley Dean Witter, predicting earnings per share growth of around 18%.
The drugs expected to give Aventis a boost include Lovenox, designed to prevent blood clotting after surgery, anticancer drug Taxotere and Allegra, an allergy medicine. Morgan Stanley Dean Witter sets a price target of e100 for the stock, which currently trades at e84.3.
Bipop-Carire: fund flows
One of Europe's most innovative banks, Italy's small and nimble Bipop-Carire has shot up in size. It is now expanding outside its domestic market, buying Entrium in Germany and smaller players in France, Spain and Portugal. Both Italy and Germany are heavily involved in pension reform.
"Bipop is one of the companies leading the growth of equity culture in Europe," says Stephen Dexter, senior portfolio manager at Putnam Investments in Boston. He thinks the bank could grow earnings of between 30% and 50% a year.
Although more expensive than the traditional banks, Bipop still looks good value compared with its high-growth peers. Deutsche Bank has a price target of e8.9 per share. That would still put Bipop at 41.8 times forecast 2001 earnings compared to competitors Fideuram (44.9 times) and Mediolanum (59.5 times).
MLP: mass wealth
Everyone is talking about the increasing demand for wealth management services in Europe. German financial services group Marschollek Lautenschlaeger & Partner (MLP) is an ideal play.
Providing insurance brokerage, investment and consulting services as well as banking and asset management, MLP targets the higher end of the market. Although off its highs, MLP is still not cheap. It trades at around e109 compared with more than e170 in October 2000 . Wait until the price hits 110 before getting in.
This stock carries a warning. As with all companies in the investment and advice sectors, MLP remains highly dependent on market performance. If you think the markets are headed for a prolonged fall this is not the company to buy.
Securitas: false alarm
Swedish security company Securitas's stock suffered last year because of concerns about cashflow and the integration of acquisitions in the US. However, the full-year results released in February seem to show the group is back on track.
"It is a well-managed company with visible growth," says Tim Stevenson, director of European equities at Henderson Global Investors in London. He expects between 40% and 45% earnings growth following the acquisition of Pinkerton in the US, slowing to around 30% after that.
Securitas is attractive for its ability to turn around underperforming businesses. Last year's reorganisation should further boost accountability and profitability. The German operation, for example, now has 110 profit centres instead of 30.
The cashflow problem that dogged the company at the end of last year looks on the way to being solved. Deutsche Bank analyst Paul Ginocchio estimates that Securitas should have a positive cashflow contribution from working capital in 2001 instead of a negative. The bank has a price target of Skr230 for the year-end.
ASM Lithography: rocky ride
Dutch-American ASM Lithography remains an attractive long-term buy. Following the merger with Silicon Valley Group in California, the group will become the largest scanner and stepper maker in the world. These machines are used to make semiconductors. The acquisition of Silicon Valley also brings Intel as a customer, the largest capital equipment manufacturer in the world.
Be prepared for bad news, however, as the semiconductor industry goes through a rough time.
"ASM is a fantastic long-term story with excellent technology but it is cyclical and risks further downgrades," warns Michael Joynson, product manager for European equities at Invesco Asset Management in London. At e20 ASM becomes a great buy.
LM Ericsson: infrastructure play
Sweden's LM Ericsson has also fallen out of favour of late. Hit by problems with its handset division, the stock has plunged 21% since the beginning of the year. Still, Ericsson's long-term outlook remains promising, largely because of its position as world leader in building cellular networks.
Especially promising is Ericsson's position in third generation (3G) wireless networks. These provide internet access to mobile phones. Also positive is the decision to outsource handset production.
Definitely not for the faint-hearted but an attractive long-term buy, expect annual earnings growth of up to 25% on average over the next five years.
NH Hotels: room to grow
If you are looking for companies that can still grow in a low inflationary environment stick to those that are close to the consumer.
Spanish hotel group NH Hoteles fits the bill. Not only does it enjoy a leading position in the key European cities of Madrid, Barcelona, Amsterdam and Brussels, it also owns a 21% stake in Italy's Jolly Hotels. For this reason it would also be an attractive takeover target for companies looking to get a foothold in Europe.
The Spanish operator also has the fastest growth rate among hotels in Europe, with expected earnings per share growth of 15% over the next few years. The European average is between 10% and 12%, according to Morgan Stanley Dean Witter.
InfoVista: fast track
This small-cap French software provider to the telecoms industry may be risky but it enjoys great upside potential. It also offers investors the chance to get in at the bottom of the growth ladder. The group made its debut on the French Nouveau MarchŽ and Nasdaq last July.
Isabelle Le Guay, portfolio manager at Credit Lyonnais Asset Management in Paris, predicts earning growth of an impressive 100% over the next two years. "We like the technology," she says. "Management is also very focused."
Buying InfoVista is a play on corporates demanding better performance from telecoms providers. InfoVista software allows them to do that. At current prices InfoVista trades on a P/E ratio of 100 times 2001 earnings. A true growth stock for the brave.
Iona Technologies: structural change
Don't be put off by Irish middleware vendor Iona Technologies'e-commerce label.
"Enabling e-business remains a structural growth area," says Garie Sharma, manager of the MST Digital Europe fund run by Merrill Lynch Investment Management.
Middleware is a type of software that enables different operating systems within a company to be linked up.
"Companies are connecting up their disparate systems to increase productivity," adds Sharma. He predicts revenue growth of 40% a year and earnings growth of between 40% and 50%.
Around 50% of Iona's sales come from its iportal suite, which provides a platform for companies to create access points on the web for their suppliers and customers. The shares received a recent boost when Iona acquired Californian business-to-business software group Netfish Technologies.
Ingegneria Engineering Informatica: new markets
Another software specialist, Engineering Ingegneria Informatica, listed on Italy's Nuovo Mercato, is also a high-growth play. This business integration and outsourcing company only listed last year but has already reported a jump in net sales of 29% to ITL350 billion for 2000.
Italy is at a later stage than other European countries in terms of IT services development, offering more room for growth. And on a P/E ratio of 33 times expected 2001 earnings, the Italian group looks reasonable value, especially since it is expected to have around 30% earnings growth a year.
This article first appeared in The Wall Street Journal Europe