After the financial and economic implosion of 2008, many companies were forced to implement drastic operational changes to stay competitive and profitable. That included increasing productivity, reducing labor resources and lowering capital spending to build cash and liquidity. These strategies had a big effect on earnings, and now the S&P 500 is on the cusp of returning to peak earnings last seen in 2007.
But while that big rebound in earnings has been great for stocks (the S&P 500 has more than doubled from its low in March 2009) it also has the private sector sitting at the top of a multi-year expansion in margins and record profitability.
Take Coca-Cola Co. (NYSE: KO), for example. The company's operating margin exploded higher out of the recession in 2009 all the way through 2011, climbing from a 10-year average of 21% to an all-time high above 33% in July of 2011.
What Coke and other big companies found out during the recession is that they could get by with fewer labor resources and increase earnings through simple margin expansion. But now, that three-year margin cycle is showing signs of topping off.
If even big companies like Coca-Cola are struggling to expand margins any further, then mid and small caps -- which have less pricing power -- are in even deeper trouble. These companies and executives have squeezed everything they can out of spending and labor costs, so future earnings growth will have to be driven by new revenue. The thing is, mid- and small-cap companies have more room to growh, so they are able to post stronger gains than slow-growing blue chips.
Therefore, to enjoy the highest possible returns next year, investors should be focusing on mid- and small-cap stocks with strong projected revenue growth. Here are four companies that fit the bill, with expected sales growth of more than 100% in 2013.
1. Ocwen Financial Corp. (NYSE: OCN)
Market cap: $3.6 billion
Projected sales growth: 103%
Ocwen Financial services residential and commercial loans in the United States and internationally. With housing showing big signs of improvement in 2012, Ocwen's share price has rallied 143% on the year. That bullish movement has been driven by surging estimates, with the full-year 2013 earnings jumping an eye-popping 208% to $4.50 a share from 90 days ago. Projected sales growth isn't far behind, with analysts calling for revenue to increase 103% in 2013, reaching almost $1.7 billion.
2. W.P. Carey Inc. (NYSE: WPC)
Market cap: $3.35 billion
Projected sales Growth: 110%
W.P. Carey is a global real estate investment trust (REIT). This stock has been having a great year, with shares up 17% in 2012, which is a solid performance compared with the S&P 500's 12% return. Analysts have recently become more bullish on the company, with the current-year earnings estimate climbing 6% in the last 90 days to $3.51 a share. Next-year's earnings estimate also rose -- about 12% -- to $3.88 a share, a solid 10.5% growth projection. In addition, analysts are looking for year-over-year sales to more than double from $150 million to $314 million. And if the company's forward price-to-earnings (P/E) ratio of 14 is returned to the industry average of 16, then shares would jump another 14%.
3. Endeavour International Corp. (NYSE: END)
Market cap: $256 million
Projected sales growth: 138%
With a market cap of just $256 million, this is a much more speculative stock than the previous two companies. This oil and gas exploration company has suffered the fate of many other energy companies in 2012, with shares down 30% on the year. The company is on pace for a loss in 2012, but analysts are projecting a big turnaround in 2013, calling for earnings of $1.02 a share, up from a projected loss of $2.84 a share in 2012. That big gain is being fueled by sales growth, with analysts calling for a 138% increase in revenue next year.
4. Allied Nevada Gold Corp. (NYSE: ANV)
Market cap: $2.75 billion
Projected sales growth: 161%
Allied Nevada Gold is a gold and silver miner that operates primarily in Nevada. Although Allied has been mostly flat in 2012, with shares down 0.3% on the year, the stock is up an astounding 460% in the past five years as gold and silver prices have hit new multi-year highs. The company is extremely profitable, with analysts calling for earnings of $1.91 per share in 2013, a bullish 183% growth projection. Not far behind is projected sales growth, with analysts projecting revenue to climb an equally impressive 161%.
Risks to Consider: Revenue gains do not always translate into earnings growth, because margin or financial restrictions also weigh in the balance sheet. Companies that increase sales quickly can also be susceptible to sharp declines in sales, as market conditions change.
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