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3 Growth Stocks for Conservative Investors

Trex Company (NYSE: TREX), Johnson & Johnson (NYSE: JNJ), and Kforce (NASDAQ: KFRC) could be perfect companies to tuck into conservative growth investors' portfolios. According to three of our top Motley Fool contributors, each of them offers investors a seemingly perfect blend of reasonable valuation and upside opportunity. Are they right for your portfolio? Read on to find out.

An industry leader with big growth prospects trading at a good price

Jason Hall (Trex Company Inc): Lumber isn't exactly an exciting growth industry, and the decking segment isn't really that much more exciting. But one small company -- Trex -- has been making a name for itself, and finding big growth by disrupting the traditional decking industry. 

IMAGE SOURCE: GETTY IMAGES.

Trex makes an environmentally friendly alternative to wood decking, from recycled plastic and wood shavings, that not only lasts for decades, but eliminates essentially all of the yearly maintenance wood decks require. Trex is also available in a number of colors and patterns, with matching railing and lighting, and is found in more retail locations than any other competing product. 

This has led to huge market-share gains in recent years. At last count, Trex commanded well over 40% of the market for wood-alternative decking. 

So what makes this growth company an ideal investment for more conservative investors? Let's start with the market opportunity. Even with over 40% of market share versus its alt-wood-decking competitors, Trex commands a small fraction -- less than 7% -- of total board-feet of decking sold in North America. That leaves a huge addressable market for Trex to take share of for years to come. 

Next is valuation. Trex shares trade for about 26 times last year's earnings, about the current S&P 500 average valuation. That's pretty reasonable for a company growing earnings at double-digit rates (and reflected in a forward PEG ratio below 1), and with the growth prospects Trex has. 

Diversified medical products with the potential to withstand economic slumps

Todd Campbell (Johnson & Johnson): This company isn't going to grow nearly as quickly as Trex, but it can pay to own dividend stocks in companies that are somewhat insulated against economic whims and whispers, and perhaps no company offers a better blend of dividend growth and insulation than Johnson & Johnson.

It's the powerhouse behind brand-name consumer products like Band-Aid. It's also a major player in medical devices used in surgery. And it's one of the largest developers of life-saving medicine. This broad-brushstroke exposure to healthcare, an industry that's known to be immune to the economic cycle, has helped it outperform the S&P 500 during past market tumbles, such as the Great Recession.

Pharmaceuticals account for the bulk of sales and profit, and while sales in that segment have flattened out recently because of competition, there's still plenty of opportunity for this business to grow over time. As fellow Fool Keith Speights recently pointed out, J&J thinks it can boost pharmaceutical sales by growing revenue for five important medicines: Stelara (psoriasis), Xarelto (an anticoagulant), Invega Trinza (schizophrenia), Imbruvica (blood cancer), and Darzalex (multiple myeloma). All five of these drugs are -- or will soon be -- billion-dollar blockbusters, and over time, all five should help Johnson & Johnson deliver top- and bottom-line growth that supports share prices.

Overall, J&J's growth isn't going to knock anyone's socks off. Sales and profit may only grow by single digits annually. And, admittedly, there's no guarantee that its history of outperformance in recession will repeat in the future. Yet aging baby boomers offer tremendous industry tailwinds, and this company's diversified exposure to healthcare, plus a more-than-50-year history of dividend increases, has me thinking J&J can be a core holding in any conservative growth investor's portfolio. 

Long-term growth from a short-term hirer

Rich Smith (Kforce): Looking for "conservative growth stocks" sounds to me a lot like the old idea of GARP investing -- seeking to buy stocks with good growth, yes, but only if you can buy them at a reasonable price. Thus, if you're a conservative investor looking to buy a good growth stock, valuation has to be your paramount concern.

What value should you be willing to pay for high growth? Personally, I've always found the PEG ratio useful in this regard. Simply put, you take the projected growth rate you're looking for and, if the company's P/E ratio is equal to or less than that growth rate, voila -- you've found yourself a potential GARP stock worth buying.

Luckily, this is easy to do with the help of a simple stock screener. Here's how: Open a screener (such as this free one from Finviz) and plug in a growth rate (I've chosen 25% or greater). Next, pick the P/E ratio you're willing to pay for that growth (here I've picked 25 times or less). Run your search, and you should quickly be presented with several dozen possibilities. Not all will be winners (sometimes the data will be bad; other times, the company will be no good), but in this particular screen, I think that Kforce stock actually looks pretty good.

Here's a stock that's compounded its earnings at 20% annually over the past five years, and that analysts think will accelerate its growth rate to 30% over the next five years. Despite this, Kforce sells for a remarkably low P/E ratio of only 13.7 times earnings.

Why is Kforce stock so cheap? Possibly because its business -- temporary staffing -- is so boring as to not interest most growth investors. But the more the U.S. shifts over to a "gig" economy in which more and more jobs are temporary, the brighter I think Kforce's prospects will become. On top of that growth, and on top of its cheap valuation, Kforce also pays its shareholders a market-topping dividend yield of 2.6%.

Buying Kforce stock at this price, with these growth prospects, and getting this big dividend in return seems like a very conservative -- and smart -- move to me. 

10 stocks we like better than Kforce
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Jason Hall owns shares of Trex. Rich Smith has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson and Trex. The Motley Fool has a disclosure policy.