Subprime Woes May Boost Growth Stocks

08/02/2007 12:00 am EST

Focus:

Louis Navellier

Editor, Blue Chip Growth and Emerging Growth

Louis Navellier, editor of Blue Chip Growth, says the problems of subprime mortgages are helping facilitate a seismic shift toward growth stocks and away from value—and he identifies two likely beneficiaries.
 
The subprime problem is primarily a banking problem. It’s also a hedge fund problem. [So], it is effectively hurting value stocks (including financial stocks) and it’s helping to facilitate the market’s “seismic shift” from value investing into growth investing. So, ironically, as more investors flee subprime-related value investing via mutual funds, managed accounts and individual stocks, growth stocks have emerged as an oasis.

To shore up the battered housing market as well as the banking industry that it regulates, I believe the Federal Reserve will have no choice but to cut interest rates. And as long as the core rate of inflation continues to moderate, I now believe we will see a rate cut some time after Labor Day.

But while housing remains a mess and even Fed Chairman Ben Bernanke thinks it will take longer than expected to clean it up, we are seeing improving earnings and the lowest price-to-earnings ratios in over a decade, which means that stocks are able to withstand the housing market’s volatility, and even most growth stocks are now reasonably priced! The stock market is not overbought; if anything, it’s just warming up!

Here are two new buys:

Foster Wheeler (NASDAQ: FWLT) is a major international building contractor that specializes in power-generating facilities. Its engineering and construction group designs and builds facilities for the oil and gas, chemical, pharmaceutical, and other industrial markets. Its global power group makes steam-generating units and related equipment for power and industrial plants, including fluidized-bed and conventional boilers.

While Foster Wheeler calls New Jersey its home, Europe accounts for two-thirds of its sales, so the company is also benefiting from the strong euro. In the past four quarters, Foster Wheeler has posted 78.4% sales growth and 254.7% earnings growth. The analyst community has raised its consensus earnings estimate 64% higher this quarter alone! Typically such positive estimate revisions precede future earnings surprises, making Foster Wheeler one of the most powerful stocks [we recommend]. The stock was recently added to the NASDAQ 100 Index and is a great Aggressive buy below $138. (It closed just above $111 Wednesday—Editor.)

Rogers Communications Class B (NYSE: RCI) has approximately 2.3 million subscribers throughout eastern Canada and is the country’s number-one cable television operator. With more than six million subscribers, the company’s subsidiary, Rogers Wireless, is Canada’s largest mobile phone outfit.

Rogers Telecom provides nationwide services as an alternative fixed-line phone carrier. The
Rogers Media unit is involved in broadcasting and publishing. If you’re a Blue Jays fan, you’ll be happy to know that a large stake of the Toronto team and their sports complex is held by Rogers.

RCI posted 17.2% sales growth and whopping 1,407.7% earnings growth in the past year.
Plus, analysts have raised their consensus earnings estimate 21.3% higher in the second quarter. The stock is benefiting from the continued strong appreciation of the Canadian dollar and is a very good Moderately Aggressive buy below $52. (It closed just below $44.50 on Wednesday—Editor.)

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