Growth. Money managers love it and sometimes it makes value investors like myself nervous. It's not hard to find these high growth stocks in the market. They sell for high multiples because investors are willing to pay for that growth and then some. They want to get in on the never ending train.

Sometimes you can buy a stock with high valuations and strong growth and make a great investment. Google (GOOG) and Stryker (SYK) are two such companies. Stryker, a medical products and orthopedics manufacturer has sported an average PE ratio over 30 for the past 5 years while the stock has more than doubled over that time. It has been successful in its business which is increasingly serving the aging U.S. population. Google has been dominating the internet since its IPO while maintaining growth in excess of 50% a year though it is finally slowing slightly.

Paying multiples higher than the companies growth prospects can set up a situation for failure. Great performance is "baked in" to a stock with rich valuations. One slip up in quarterly earnings or some fluke bad news that the CEO is hospitalized with the flu and the stock tanks. It never was worth that much to begin with. Investors had become greedy. Starbucks (SBUX) a company I presented in Enjoy the Bubbles While they Last had seen its price fall while business deteriorated. The deterioration may or may not have been warranted as it has just been announced that Howard Schultz will be coming in as CEO replacing Donald and the stock has risen 8%. If Starbuck's is to succeed it must re-invigorate its brand which has done so much for it over the years and find a way to compete with a fast growing industry. It is hard to compete when your coffee quality is constantly being challenged. Perhaps now is a good time for rival coffee chains like Caribou Coffee (CBOU) which I talked about in Waiting for Something Good at Caribou Coffee last year to increase their marketing and brand recognition.

In the hunt for the best growth stocks it is good to find ones that sell for low multiples relative to expected growth. Price to earnings growth ratios (PEG) can give a thumbnail valuation on discounted growth. Famous portfolio manager Peter Lynch who repeatedly delivered exceptional returns would use such analysis. He generated returns for investors even as his fund kept growing, disproving the common myth that the larger your capital base the harder it is get great returns. Here are some stocks that might fit the bill.

ADAM Inc. (ADAM), an online health management company is expected to grow over 30% the next 5 years but trades for 24 times earnings. They have been boosting guidance and have a 5 year PEG ratio below .8.

VCG Holding Corp. (VCGH), owns adult nightclubs and maintains a profitable business model catering to affluent customers. They are expected to grow earnings 75% next year and trade for 25 times earnings with a PEG ratio below .5. Sales are expected to grow 125% next year.


full disclosure: long Stryker (SYK)no position in other companies
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Here is A good Jim Cramer Impression, and another.

Eric Fox's ideas ideas on how a US recessions impact cannot be ignored.

The Top stories of the week at Value Investing News.

I think you may be right Erin Burnett but tell us how you really feel.

Coming up, some small-cap companies that have a lot of growth ahead and are being ignored. And can you name the U.S. retailer with high quality brands selling for less than its net current assets (aka really friggin cheap!) ?

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Phoenix Footwear Group (PXG) was getting pummeled all year just like its fellow retailers. I happened to come across the company just weeks ago and wrote about them in Phoenix Footwear (PXG): Potential in a Struggling Retail Holding Company .I liked the potential for a turn-around and expected that they would sell a brand to get some cash. Heck, they even alluded to it I thought in the 3rd quarter conference call. The Heartland Value analyst must have been really excited, spending maybe 10 minutes or more asking great questions. Now the stock has risen 108% since just before the holidays.

They just sold their Altama military footwear division to Tactical Holdings, Inc. for approximately $15 million to pay down debt. They bought it in 2004 for $35.3 million. Not to great. Actually I still think the company is struggling. It should even be a good Tim Sykes short play this afternoon or after hours. This stock has to cool off soon! Doesn't it? For the long term I can't say right now If it is a good buy as I haven't crunched a fair value yet. There should be a lot of long-term value popping up in these retailers as even the best ones get beaten down.



full disclosure: no position in Phoenix Footwear Group (PXG)
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I just wanted to bring everyone up to speed on the slight changes I've made on the site over the last few months.

With IQ, I've worked on making it easier on the eyes(less annoying ads) and more functional. You'll notice the search function at the upper right hand corner. It now works. You can type a ticker and it searches all of Investment Quest.

You should be able to get a feed from the site. There is a "subscribe in a reader" link a few scrolls down on the right hand column. You can use the treasurehuntingquest.blogspot.com url to get emails. Also, for your convenience there is a link at the upper left hand corner to go right back to the homepage to make navigating easier.
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One of the biggest faults investors make when it comes to investing in stocks is confusing price and value. They see a quote on the exchange but don't grasp how trivial it really is. One of the strategies that has made many patient investors rich like Warren Buffett and Benjamin Graham is to think of a stock as a company with an intrinsic value that is separate from the stock quote. You should ask yourself, how much would I pay for this company per share without even thinking about how the manic-depressive stock market was pricing it. You simply buy when the price drops below its value. Its not as sexy as Erin Burnett, crunching numbers with calculus or looking for cup and handles, supports, or 50 day moving averages, but it works.

How much would you pay for a stock that has $4.69 per share in book value(assets minus liabilities), year over year revenue growth of 81%, has grown earnings to $.23 a share or $3 million from $2.1 million the year before and has bought back over half its shares over the last two years? If you were skeptical you would say, well Mark maybe that $4.69 in book value is in some inferior product on a shelf and they have no cash and a lot of long-term debt. What if $3.44 of that was in net current assets, mostly cash and investments? What if the total debt to equity ratio was very low at .12 and they had shareholder equity of $45 million and only $69 thousand in long-term debt? You might say, so a company that can grow well and is boosting earnings with buybacks should be easily worth at least its current assets right? Wrong. Envoy last traded for $2.88 per share.

I think this is a very interesting company. They were incorporated in the Province of British Columbia, Canada in 1973 as Potential Mines Ltd. Current CEO Geoffrey Genovese was with the company since its inception. I tried to dig up some quick info on the original company but came up empty handed. The Potential Mines name is interesting because of an investment Envoy currently has in Mosquito Consolidated Gold Mine (MSQ.V). Its shares have been a multi-bagger over just the past few years. Mosquito is a $56.4 million dollar company with projects in North America, Canada and Australia. Mosquito has grown shareholder equity from $2.5 million in 2005 to $9.4 million as of their last quarter this year.

What does Envoy Capital do? They provide loans and equity investments between $500,000 and $3,000,000 to publicly listed and private companies, operating in a variety of industries including media and marketing services, resources and real estate. For the twelve months ended September 30, 2007, the Company generated a return of approximately 15.7% on its invested capital. Their wholly owned subsidiary, Watt International is one of the world’s leading brand strategy and design consultancies. Envoy provides consulting, branding, packaging and retail design services to clients in Canada, the United States, Mexico, United Arab Emirates, China and South America. Watt International’s clients include: Meijer, Inc., The Great Atlantic and Pacific Company, Dubai Festival City Retail Development LLC, McDonald’s Restaurants of Canada Limited, and Wal-Mart Stores Inc. Watt also plans on opening a long-term location in Dubai and a new location in Shanghai, China to continue the recent success of the company.

An interesting thing happened around September 15, 2006. Envoy sold its United Kingdom subsidiaries, ECG Holdings (UK)Limited, Watt Gilchrist Limited and Parker Williams Design Limited. Notice the quick 35% spike in share price in early September.



The selling of the European division of Watt and the recent name change to Envoy Capital Group Inc. from Envoy Communications Group Inc. looks like a trend to focus on their core merchant banking company. It seems likely that they will sell the rest of Watt soon. The value in Watt looks like a gem hidden behind their merchant bank. Not many investors are interested in banks nowadays not to mention a small company like Envoy with a market cap of only $27.7 million. The cash they could get if they sold Watt would be about $1.50 per share making the stock even more undervalued. So, we are looking at a share price of $2.88 and asset value of over $5 per share. The value in Watt will make this an interesting stock to watch in 2008 and 2009. I think the value added by share buybacks and earnings growth or even the sale of Watt will propel the stock. The apparent separation of the stock price from the intrinsic value should eventually be reflected in the stock price.


full disclosure: long Envoy Capital (ECGI)


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