Dear Mr. Berko:

Please give me two long-term growth stocks. I’d like one to be in the transportation industry, like a trucking company or a railroad, and the other to be in the medical industry, like a drug company or a health insurance company.

M.S., Erie, Pa.

Dear M.S.:

Growth stocks are common as crab grass, but good growth stocks are as common as four-leaf clovers — and the only four-leaf clover farm I know about is in Largo, Fla.

Gomez O’Malley, an analyst who retired some years ago from Fidelity Funds, lives practically across the road from that clover farm and on occasion gives me some pretty good growth issues. His selection prowess is still legendary among some analysts at his old firm, so I decided to phone him, and here are two of his four-leaf-clover stocks:

Kirby Corp. (KEX-$36) has two main businesses. Its marine transportation service operates 897 inland barges, 239 inland towboats, four offshore dry-cargo barges and four offshore tugboats. This division provides inland transportation of petrochemicals, black oil products, refined petroleum products and agricultural chemicals. Its big customers are the Navy, Coast Guard, oil companies, offshore fishing companies, agricultural chemical companies and offshore barge operators. It’s a smelly, dirty but richly rewarding business.

KEX’s diesel engine service division provides aftermarket services for large, high-powered, high-speed diesel engines used in various inland and offshore marine industries. KEX has a dozen years of superb revenue and earnings growth and a reputation for dependability, quality and efficiency that keeps its customers loyal.

Gomez believes that demand for KEX’s inland transportation services will continue to strengthen and that healthy capacity utilization continues to support higher rates. Diesel services income grew 40 percent this year and is also benefiting from strong demand and higher utilization.

Margin expansion is likely and net profit margins should increase 10.5 percent this year as profits grow by 40 percent to $1.80 a share. And at 21 times earnings, the shares are a compelling buy for the years ahead.

KEX has a strong balance sheet, low debt, impressive cash flow and just 53 million shares out. Its income statement is clean and bereft of fancy accounting devices. Value Line believes this could be a $50 stock in a couple of years.

Gomez tells me that Stryker Corp. (SYK-$53.42) is the pre-eminent company in powered surgical instruments and orthopedic implants. Revenues in 2005 were $4.9 billion and SYK earned $1.64 a share. This year’s revenues should be $5.6 billion and SYK looks to earn $2.03 per share.

Long-term demographics augur well for continued growth and SYK’s incomparable research and development continues to excite the medical community with new orthopedic products as well as surgical instrumentation. In 27 of the past 28 years, SYK’s net income has increased by at least 20 percent. The net profit margin of 14.7 percent last year is expected to grow to 17.4 percent in the following three to four years.

SYK has zero debt, $1.4 billion in free cash flow (great for acquisitions and stock buybacks) and pays a niggardly dividend of 11 cents. The new chief executive officer, Steve MacMillan, is roundly respected in the industry, and since taking the helm in 2004 has delivered 22 percent increases in per-share profits. MacMillan expects to engineer a number of small strategic acquisitions in very healthy niche target markets.

Entry into these specialty markets gives SYK a good toehold from which it can provide new products to generate higher revenues and improve profits. MacMillan will be keeping a keen eye on costs and efficiencies. The shares are trading at 26 times 2006 earnings, which is the bottom range of its all-time low. The stock has not done well this year (health equities have struggled as of late) while most of the market’s money has been chasing energy and oil issues.

Gomez believes it’s Stryker’s time once again, and that the stock should trade at a price-earnings ratio of between 33 and 36. Standard & Poor’s has a “strong buy” rating on the stock, and Value Line believes SYK could trade above $100 in the next few years. And I think Gomez O’Malley is right on target.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.

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