Growth Stocks

Growth stocks are companies that are likely to have sales and earnings growth well above market average. Frequently they pay few, if any, dividends. Instead they typically reinvest any extra cash flow to promote further growth. Chosen wisely—according to Pat McKeough’s advice—high-quality growth-oriented stocks can be worthwhile additions to most well-diversified portfolios.

Although growth stock picks can be highly volatile, they can make good long-term investments. They may be well-known stars or quiet gems, but they do share one common attribute—they are growing at a higher-than-average rate within their industry, or within the market as a whole, and could keep growing for years or decades.

And keep in mind that we focus on growth stocks, which have a good long-term history and favourable prospects. We downplay momentum stocks that tend to attract many investors simply because they are moving faster than the market averages, but are liable to fall sharply when their momentum fades.

There’s room for growth stock investing in your portfolio, but make sure you follow our TSI Network three-part Successful Investor strategy for your overall portfolio:

1-Invest mainly in well-established companies;
2-Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
3-Downplay or avoid stocks in the broker/media limelight.

Cintas Corp

Cintas demonstrates the advantages of a niche stock operating a business with specialized products and services that are hard to replace. That helps protect the company from new competitors. Cintas can also fuel its growth by making strategic acquisitions, as it did when it bought a compatible Minnesota-based company for $2.2 billion this year. A dominant position in its niche industry enhances the company’s long-term growth prospects, and it has raised its dividend every year since it went public over three decades ago.

CINTAS CORP. (Nasdaq symbol CTAS; www.cintas.com) is North America’s largest provider of corporate uniforms: it has over 1 million customers.

In addition to renting and cleaning uniforms, Cintas also rents out a variety of related products such as mats, towels, mops and cleaning supplies. As well, it sells first-aid kits, fire extinguishers, sprinklers and emergency-exit lights.


Soar above the crowd

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In March 2017, Cintas completed its acquisition of Minnesota-based G&K Services Inc. That firm supplies corporate uniforms and other services. It has 165 facilities across the U.S. and Canada.

Cintas paid $2.2 billion, which included G&K’s debt. The company expects eliminating overlapping operations will let it cut between $130 million and $140 million from its annual costs by the end of the fourth year.

Growth stocks: After acquisition, debt still at reasonable levels

 

Meanwhile, Cintas’s revenue in the fiscal year ended May 31, 2017, rose 11.0%, to $5.3 billion from $4.8 billion in 2016. Excluding G&K, revenue gained 7.1%.

Earnings in 2017 rose 1.9%, to $457.3 million from $448.6 million. Due to fewer shares outstanding, earnings per share gained 3.7%, to $4.17 from $4.02. If you exclude costs related to the G&K purchase, Cintas earned $4.77 a share in fiscal 2017.

Cintas had to borrow the cash it needed for the G&K acquisition. That increased its long-term debt from $1.0 billion in 2016 to $2.8 billion as of May 31, 2017. That’s still a reasonable 19% of its market cap.

The stock has gained 27% in the past year, and now trades at 26.4 times the $5.18 a share it will likely earn in fiscal 2018. That’s a somewhat high multiple, but still reasonable for a company that dominates its niche industry.

In 2016, the company raised its dividend for the 33rd consecutive year. Cintas pays the dividend once a year (in 2016, the payment date was December 2). Currently, the $1.33 dividend yields 1.0%.

Recommendation in Wall Street Stock Forecaster: BUY

For our recent report on a Canadian growth stock that we rate as a buy, read A boom in pilot training will lift this stock.

For our views on a questionable category of growths stocks, read Are new stock issues a good deal for investors, or a risky investment?

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