There are lots of good businesses with continued price momentum in this market. The business cycle is right for a lot of industries, but individual stock selection is key in an equity market at its high. Here are two great examples of two smaller companies that are in growth mode and getting the cycle right.
The Toro Company
The Toro Company (TTC) is a great business that sells turf maintenance and irrigation equipment. This is a perfect example of the type of great enterprise investors should consider when it’s down on the stock market (as Toro was just recently).
Based in Bloomington, Minneapolis, the company sells mostly to the professional market, with residential sales representing just less than 30% of total revenues.
Turf maintenance is big business—and it’s not only for golf courses and sports fields. The company’s branded equipment is sold to customers in the agriculture, government, rental, contracted, and residential areas. Toro is also now branching out into more snow removal equipment. (See “Off-the-Radar Company Delivering Attractive Earnings.”)
As a mature business, the company’s most recent quarter produced very good gains in total sales and earnings, especially.
So far this year, Toro has seen a material increase in sales to landscape contractors, more sales of micro-irrigation products, and improved sales to equipment rental businesses.
International sales have been mostly flat this year. It’s the domestic market where the company is experiencing growth.
Wall Street earnings estimates for Toro have been ticking higher for the company and rightfully so. This past Thursday, Toro reported record results for its fiscal 2014 earnings report. For the company’s fiscal year, sales increased 6.4% to a record $2.2 billion and net earnings were up 15% for a record $3.02 per share.
While things are heading upward for the company at this time, Toro may experience a correction in 2015. While I’m not recommending investors buy the stock right now, it is the type of solid mid-cap pick investors should look to on price weakness for long-term staying power.
Another small- to mid-cap business that I like is LifeLock, Inc. (LOCK) out of Tempe, Arizona. This firm sells identity theft prevention services and it’s worth having on your radar.
The company sells subscription monitoring of your online identity/actions; it’s kind of a unique business, but it’s proven to be a fast grower.
In its third quarter of 2014, the company’s total sales grew 29% to $123 million. The vast majority of the company’s revenues are to the consumer market, although it is trying to get more enterprise sales.
The business is profitable, but management is plowing money into new subscriber growth, so comparable earnings have been up and down.
The company went public in October 2012, and it finished its third quarter with $238 million in cash and 3.52 million total subscribers, adding 264,000 gross new subscribers during the quarter.
LifeLock has had a few blips in its business execution and the stock suffered for it. But the position looks to be well into recovery mode now, and it’s still a growth story.
Of these two companies, for the investment risk, I like a company like Toro for long-term equity portfolios. It pays a small dividend (which is due for an increase next year) and the professional turf market offers relative consistency in terms of demand. The company has a lot of brand loyalty, as well.
Overall, this is a market in which investors should be very picky. Good entry points matter, especially at this time, because the broader stock market is at a record-high.