The negative fourth-quarter gross domestic product (GDP) reading of -0.1% caught most Wall St. analysts and economists by surprise. This unforeseen number was skewed by a huge decrease in government spending. Most now expect the number to be revised to a positive reading, and the first quarter to show 1% to 2% growth. This slow growth scenario is just the right playing field for Bank of America Corp. (NYSE: BAC) secular growth stock picks.
In the past, when U.S. GDP growth was between 0% and 2%, the secular universe outperformed the rest of the Russell 2000 by 3.2% over the subsequent six months and by 7.2% over the next 12 months. The Bank of America/Merrill Lynch team screened the Russell 2000 and the Russell Midcap looking for stocks that met their secular growth definition. These are names with lower-than-average variability of earnings, and they are expected to deliver 10% to 20% earnings growth over the next three to five years.
We looked for the top four stocks in their small and midcap secular growth universe with the highest earnings growth rates. In the mid cap stocks, the top four stocks Bank of America has a Buy rating on are PetSmart Inc. (NASDAQ: PETM), the much talked about Herbalife Ltd. (NYSE: HLF), Myriad Genetics Inc. (NASDAQ: MYGN) and Actavis Inc. (NYSE: ACT).
In the small cap arena, the top picks with the highest earnings growth rates are Sonic Automotive Inc. (NYSE: SAH), Heico Corp. (NYSE: HEI), FEI Co. (NASDAQ: FEIC) and Grand Canyon Education Inc. (NASDAQ: LOPE).
With most analysts expecting another year of slow U.S. growth, this list is timely in two ways. Finding the companies with the fastest earnings growth may help to protect the stocks, should the economy slow down even more. Secondly, small and mid cap names often are more exposed in their business in the U.S. rather than abroad. That can help insulate them if world growth declines as well.