4 earnings growers in dull markets

You can find good investing prospects by looking for good companies in dull or hated industries where market sentiment has beaten down expectations. It may be a case of “guilt by association” — because it is related by industry or recent news, the company gets sold down.

A stock’s price has built into it what the market anticipates to happen, and when “Mr. Market” is depressed, then everything’s discounted. Good companies still thrive through hard times, and usually are the first to rise when the market turns up.

These four ASX 100 companies all have had negative average earnings growth over the past three years, but just within the past year have turned earnings per share (EPS) growth strongly positive. Their share prices are up, but they don’t have fantastically high price-earnings (PE) ratio — 3 of the 4 are close to book value.

Downer EDI (ASX: DOW) has had some heavy write-downs over the past several years as the mining services and resources industries have cut back on developments and expansions. These earnings go flat in 2010, and turn into a loss in 2011, but just this year it turned the biggest net profit after tax it ever had in the past 10 years. Its 10 Oct share price of $4.45 is only 6% above its book value per share, and its PE ratio is 9.75.

Oil and gas explorer and producer Beach Energy (ASX: BPT) has increased EPS growth by 39%, and has achieved a 10.88% return on equity, the first time it has been over 10% since 2005.

Apart from its regular oil and gas production in the Cooper Basin, it is developing unconventional gas reserves in coal seam gas and shale oil there. The area is seen as the next big region for unconventional gas, and is attracting domestic and international attention.

Macquarie Group (ASX: MQG) EPS growth for this year was up 21.6% to $2.46 a share. This investment bank is forecasted by analyst consensus to have an average 20.2% annual EPS growth for the next three years, and its PE ratio is 19. If the annual EPS growth is about equal to its PE ratio, then it is fairly valued for the earnings growth expectation.

As the economy strengthens, the company will have more investment opportunities, more mergers and acquisition service fees, and its growing residential loan book will grow as the housing market turns up again.

Finally, speaking of property, the fourth company is GPT Group (ASX: GPT), which invests in and manages commercial and retail real estate. It boasts 1-year EPS growth of 63.5%. Its share price has been between $3 and $4 since 2009 after being crushed by the GFC. The real estate industry has been depressed for a number of years, yet when the economy turns around, companies will need more office and store space, so GPT Group’s investments and management fees will increase.

Forecasted EPS growth in the short term may not be as strong as this year, so an economic recovery may not be quick immediately, but the compounding growth may kick in a couple years further down the track. Current share price is less than book value per share, and the PE ratio is 11.

Foolish takeaway

If you buy the hottest stocks, you will have to pay a premium for them, and if they don’t live up to expectations, they can be sold off hard. Finding good companies at a discount when everyone is still skittish about an industry is a good way to add to your return. Like they say in real estate, “half of your profit is in your purchase price”. That has never been more true.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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