Wonderware (#56) experienced more than 60% growth in sales and earnings in 1994, and we expect the company to continue to grow by 50% in 1995. Its strength lies in its core product, software that allows engineers to monitor the manufacturing process as it's occurring so they can gain maximum efficiency and will be aware of any potential problems. Also, there's room for Wonderware to grow its installed base and enter different segments of the market. My portfolio is 40% technology because that's where we're finding all the growth companies.
Hollywood Entertainment (#23) is a video superstore like Blockbuster. It has a focused strategy. It does only video and video-game rentals and sales. It's also a cash-flow-positive business, and its return on investment for building new units and acquiring units is very favorable. Basically, Hollywood Entertainment is the only video superstore that has been able to compete with Blockbuster. The movie-rental market accounts for 50% of a movie's gross, so it continues to be an important channel for the movie-production houses.
Papa John's International (#68) is committed to doing only one thing, and that's pizza delivery. It has a rapid-expansion strategy that is well executed and focused. It's been able to expand the number of stores in markets without taking away from the sales of its existing units, so its sales per unit continue to go up, which means it's gaining market share from Pizza Hut and Domino's. The company's return on cash investment for each new restaurant is more than 100%. In 1994 the company's revenues grew by 81%, and earnings grew by 78%.
Alternative Resources (#83) also looks good. It provides personnel for specific technology projects. The company operates on an office model in which growth is generated through the opening of new offices and through the existing offices. It's a management-intensive business because you have to have good controls on your offices, which are responsible for their own profits and losses. Alternative Resources does a great job of hiring and motivating managers. It's in a growing market: as companies continue to downsize they will continually turn to people like Alternative Resources. Increasing the number of long-term partnering relationships gives Alternative Resources more visibility with its clients and a better understanding of their needs. In some cases Alternative Resources has taken over whole departments. It also helps keep turnover low and costs down. In 1995, 40% growth is expected in the company's sales and earnings.
* * *
David and Thomas Gardner
The Motley Fool
America Online's Foolish Investors
Alexandria, Va.
Assets: Manage $50,000 of their own money
Performance: Up 11.03% since August 4, 1994, when the Gardners started investing
Top Inc. 100 Picks: Cisco Systems, Hollywood Entertainment, Network Peripherals, OfficeMax, Ventritex, Wall Data
In valuing small-capital growth stocks, we use the Fool Ratio. Essentially, what we're doing is comparing the price-to-earnings multiple with the company's earnings-per-share growth rate. We toss out all sorts of standard marketwide multiple analyses and assert that the price/earnings ratio cannot be judged in a vacuum. It's got to be compared with a company's growth.
It's also important that a company have enough cash to support its operations. Is it cash-flow positive? Earnings can be misleading, since the company can take on a huge amount of debt to grow. You've got to look over the balance sheet to make sure the company has positive working capital, and look at the cash-flow statement to make sure there's positive cash flow for the quarter. We also look for zero or very negligible long-term debt.
Cisco Systems (#62) has no long-term debt and plenty of cash on the balance sheet. We think it's worth buying because its sales growth has been phenomenal, and it's in the right industry. The automated-teller-machine-switching and network-management-software industries will continue to boom in the coming years.
Wall Data (#44), a connectivity-software company, also has no long-term debt. There's lots of cash on the balance sheet and high profit margins, around 20%. Its earnings-growth projections run upwards of 40% annually.
Cisco Systems and Wall Data saw their stock prices get cut in half in the summer of 1994. Since then they've come charging back. We always look for stocks that are going to double. We think that a year from now stock from both companies will be fairly priced at least 20% higher than it is now.
Network Peripherals (#5), another company in networking solutions, saw its stock price more than triple last year. We think by holding any one of these stocks for at least 24 months you're going to see market-beating returns.
Ventritex (#15) makes implantable devices that regulate the speed of the heart; the product launched the company into tremendous growth, but it showed negative earnings in 1991, 1992, 1993, and halfway through 1994. But we always take a long-term approach. The company recently turned the corner into profitability, and its earnings estimates are extremely strong. Also, it's a small company, which we like, and it has more than $100 million in sales, with no debt.
