"It doesn't take an investing genius to pick Microsoft out of a crowd," say Stephen Gandel and Lisa Gibbs in Money. Establishing which fledgling company could be the next Microsoft, however, is "exceedingly difficult". Most of the firms touted as future blue chips stumble as their success spurs competition and they find that managing an expanding operation is too complex. Nonetheless, getting it right means "fatter returns" than usual, so it's well worth trying to identify potential titans. To this end, MoneyWeek has screened the market for stocks popular with fund managers who specialise in medium-sized growth companies (the sector most likely to contain tomorrow's blue chips). Candidates also had to display regular annual earnings growth of at least 15% and sales growth of at least 10%. Of the 20 firms that made the cut, the following look "attractively valued" with 2004 p/e ratios at, or below, their anticipated earnings growth rate. Studies show that growth stocks with a price to earnings growth (PEG) ratio of 1 or below tend to outperform the market.
Affiliated Computer Services (ACS) "has turned paper-pushing into an earnings machine". The group has reeled in "scores of corporate customers" - including Motorola and General Motors - and a number of state governments thanks to its ability to handle back-office operations (such as processing insurance claims, loan documents and human resources forms) "on the cheap". Annual revenue growth has averaged 17% since 1998 and should continue at this clip as cost-conscious firms and cash-strapped local governments keep seeking ways to trim costs and slash paperwork, and as ACS enters new markets, such as toll collection. Earnings should expand by an annual average of 20% over the next five years, yet the stock is on a 2004 p/e of 17.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
1,000 children hold over £100,000 in a junior ISA – how to grow tax-free nest egg for your childJunior ISAs can be a tax-efficient way to grow a nest egg for your child. We explain how they work
-
How to start investing: a beginner’s guideGetting started in investing is a great way to make your money work harder for you over the long term, as investments tend to outperform cash savings
