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A stock picker’s guide to gold, chocolate milk and marine air guns

Growth stocks come in all shapes and sizes, says this U.S. advisory, which likes a few very familiar stocks and a unique energy firm.

As a rule, when an advisory devoted to “growth stocks” comes across our desk, it frequently equates “growth” with “small.” The stocks often trade at five dollars or so with an eventual target price around ten. There are biotechs creating new drugs, high-tech companies that “provide solutions” to any number of technological quandaries and other such upwardly mobile firms.

And there’s nothing wrong with that. Getting it right with one of those small fry can be a very lucrative proposition. But bigger stocks can grow too. (The stock market would be a stale place, indeed, if all the movement took place among the bottom feeders while the big fish simply spit out dividends.)

That’s certainly the opinion of Growth Stock Outlook, an advisory published in Chevy Chase, Maryland, a suburb of Washington. D.C.

The advisory’s portfolio — up “a tad” this year — contains a number of familiar names, including some Canadian content. Our chief interest today is a stock that plays an unusual role in the oil and gas industry, but first we’ll take a brief look at names that need no introduction.

Tattooed on the brain

The editor, Mr. Charles Allmon, prefaces his portfolio review with the observation that back on “Black Monday”, October 19, 1987, this advisory’s own Growth Stock Outlook Trust was the only U.S. equity fund to gain money that day.

Of today’s unsettled markets, the editor comments: “I see fully invested bears everywhere. Never has the old saw that the stock market always goes up been more prevalent. Unfortunately, this psychosis seemingly is tattooed on investors’ brains!”

Then he gets down to cases, including some Canadian content. “Our two gold shares, Newmont Mining (NYSE-NEM;TSX-NMC) and Barrick Gold (TSX/NYSE-ABX), fell out of bed in March as the gold price plummeted. NEM reported a poor year in 2007, but I’m hoping for a better 2008. Meanwhile, Barrick continues as the world’s biggest gold miner and expanding as fast as they can put new mining deals together.”

If we had a dollar for every U.S. advisory that liked Barrick, we’d have more than enough to pay for our morning coffees for the next few weeks.

Nutrition and chocolate milk

Mr. Allmon reserves a good deal of enthusiasm for a very big company with a very big growth model. Nestle (NASDQ-NSRGY) is transforming itself, its outgoing CEO proclaims, into a Nutrition, Health and Wellness company. Hence the purchase of two Novartis divisions, the Medical Nutrition group and Gerber baby foods.

“Make no mistake,” says the editor, “this is an extraordinary company. Broad international distribution of Nestle products would assure that this company will never be seriously affected by poor sales in one country (or even a few). In the food arena, their product line is as diversified as their worldwide distribution system.”

So there is still growth in a stock that trades in the $125 area. And they haven’t stopped making chocolate milk and chocolate bars, either.

Seismic energy under the sea

Now for a stock that’s anything but a household name. If you’re looking for what’s called a “niche” company, this is about as niche as it gets. Bolt Technology Corporation (NASDQ-BOLT) makes seismic equipment used in underwater exploration for oil and natural gas.

That includes seismic energy sources (marine air guns), seismic source controllers and synchronizers, and underwater cables and controllers. Here’s how they work.

“Bolt’s seismic energy sources create elastic waves which are reflected back by variations in rock layers to hydrophones and other collection devices that receive and record the reflected signals.”

Its customers are largely private contractors working for international oil companies. In 2007, four customers accounted for 50 per cent of total sales, with about 70 per cent for foreign exploration projects. The firm’s high-demand seismic equipment accounts for 93 per cent of sales.

Since 2003, Bolt’s sales have accelerated significantly. Oil and gas exploration has exploded in the past few years, as we know, and Bolt is reaping the benefits. Over the past four years, sales have risen by 50 per cent annually, with earnings going up an average 85 per cent per year.

Record numbers of air guns

As energy exploration grows, so does Bolt’s stable of technology. Soon it expects to be using 4-D and wide-azimuth seismic surveys to improve the exploration and management of reserve fields (roughly, using wider angle geophysical surveys that up to now have been prevalent on land but not underwater).

Last year, Bolt acquired Real Times Systems, another maker of seismic equipment, and a specialist in products for the growing electromagnetic exploration market. This purchase also came with a new group of customer contacts. “Expanded exploration in the Gulf of Mexico and significant deepwater discoveries in international waters should also drive growth over the next decade,” adds the editor.

He expects the company’s strong earnings trend to continue in fiscal 2008, with record numbers of seismic air guns, monitoring systems, connectors and cables shipped through the end of December. The RTS acquisition has sales and earnings up, and new orders keep pouring in. “Bolt’s soaring return on equity, which climbed above 26 per cent in fiscal 2007, could improve further.”

Concludes Mr. Allmon: “While we do not expect sales and earnings to continue their current torrid pace, reasonable growth should continue as long as commodity prices remain high, spurring exploration. Current valuations appear to offer fair returns for the risk. Top buying limit around $20 suggested.”

When this issue hit the press last week, Bolt was trading at about 9 times estimated 2008 earnings, at $15.21. Today it is trading at closer to 10 times earnings as the price has risen to $18.01.

So a growth stock is still a growth stock, be it small, big or somewhere in between, on land or sea or in the depths of the ocean. Best of all, you can still find stocks that grow even when the markets are in the depths.