There's nothing innovative about a hamburger. No matter what a chef does to one, it's still a slab of beef and some condiments nudged inside a bun -- a product that's been around since at least the late 19th century. There's nothing particularly sexy about a fast food joint that sells those burgers either -- or for that matter, a makeup manufacturer or a water utility. But while the stock market buzz is ever focused on companies that make and sell the next new, new thing, some pros say investors can do well by selectively buying up shares in businesses that do boring stuff -- but whose sales and profits are quietly rising from quarter to quarter.
Call them "stealth" growth stocks, companies that have a steady history of expanding, even though they offer a product more likely to be found at, say, a truck stop than at Best Buy. Typically, the firms who make and sell such everyday things (known as consumer staples), or that distribute essentials like power or water (utilities) tend to be more recession-resistant, so it's no surprise that investors flock to such stocks when times are tough. But with the economy now regaining steam, both of these groups, on the whole, are being ignored, as sectors like financial services, information technology and consumer discretionary (each up by at least 17 percent) tear up the Street. And that long-term pattern, say analysts, might offer investors an opportunity. For while those workaday stocks "are easy to dismiss," says Michael Sansoterra, lead manager of the $317 million RidgeWorth Large Cap Growth fund, they contain some under-the-radar rockets.
Some pros say investors can find firms that are growing profits quickly -- even in sectors not known for runaway growth.
Philip Morris International (PM)
This cigarette manufacturer (spun off from the Altria conglomerate in 2008) gets all of its revenue from overseas. The firm's ability to raise prices on its popular Marlboro brand, analysts say, contributed to its 14 percent sales growth in 2011, compared with the year earlier.
More than 80 percent of the Golden Arches are owned and operated by franchisees, a "wonderful business model" that keeps the cash rolling in to the Oakbrook, Ill., company, says Bill Vogel, CEO of Montag & Caldwell, which manages $14 billion and is a shareholder. The stock also pays a 3.1 percent dividend.
TW Telecom (TWTC)
This Littleton, Colo., telecom is gaining market share from bigger rivals through more-attentive customer service, says Donna Jaegers, senior analyst with financial-services firm D.A. Davidson. She predicts that the company's "momentum over the next few years" will justify the valuation of the stock, which trades at 39 times 2012's estimated earnings.
Estee Lauder (EL)
Consumer-staples firms often have trouble cutting costs because many lack pricing power. But the New York-based cosmetic giant has done a "stellar job" of communicating the value of its skin-care line, leading to price increases and double-digit profit growth, says Michael Sansoterra, lead manager of the $317 million RidgeWorth Large Cap Growth fund.
American Water Works (AWK)
Investors don't normally associate highly regulated businesses with strong growth, but the Voorhees, N.J., water utility is an exception, says Matt Berler, president of Osterweis Capital Management. The utility has gotten aggressive about approaching state utility commissions for rate increases, and Wall Street's earnings estimates for the company are "consistently too conservative," Berler says.
For the most part, such stealth growers have been boosting profits -- not by trimming costs, but by selling more stuff (often at higher prices). For instance, sales at cosmetics company Estee Lauder are up 13 percent over the past year, an impressive feat, analysts say. The double-digit sales growth in its skin-care line, moreover, is a particularly good sign, says Sansoterra. "When you get a company that can do that," he says, "it doesn't matter that it's a staples company." Investors should look for firms that can grow at a faster rate than their sector peers, regardless of how their stocks might be labeled, says Brian Jacobsen, chief portfolio strategist of the Wells Fargo Advantage funds, which manages $213 billion.
Some of these familiar names wind up strong long-term performers as well. McDonald's stock, for example, is down nearly 10 percent in 2012, but its five-year history tells a different story: Shares of the burger behemoth have returned nearly 104 percent after dividends -- the broader market, down 4 percent. Margie Patel, senior portfolio manager of the $533 million Wells Fargo Advantage Diversified Capital Builder fund and a shareholder, likes how the chain has added specialty coffee and other menu items, all of which helped boost sales 12 percent in 2011 over 2010.
But experts say investors can't just jump on every burger chain and makeup maker. Sansoterra says he winnows the list by focusing on companies that generally exceed investors' sales and profit expectations. He also favors firms that either offer a product or services that shakes up their markets or that can benefit from long-term trends, such as the growing affluence of consumers in developing countries. Indeed, success abroad has contributed to strong sales growth at Estee Lauder, which gets more than half of its sales from abroad. John Osterweis, meanwhile, thinks he has found his stealth growth on the big screen. The chief investment officer of Osterweis Capital Management likes Cinemark Holdings, a movie-theater operator in Plano, Texas. Competition from firms like Netflix has convinced investors that the movie-theater business is "at best mature and at worst dying," he says, yet the company is posting mid- to high-teen sales growth in Latin America.