To create the list below we began by looking for basic materials stocks with 5-year projected EPS growth above 15%. Could there be a fundamental reason for this growth potential? We researched the financials for at least one fundamental reason which could trigger the growth.
To start, we screened basic materials stocks for strong sales trends by comparing growth in revenue to growth in accounts receivable. Since accounts receivable is the portion of revenue not yet received, and there is no guarantee the money will ever be received, the smaller the portion of revenue made up of receivables, the healthier the company's revenue.
We specifically screened for stocks seeing faster growth in revenue than accounts receivable year-over-year, as well as accounts receivable comprising a smaller portion of current assets over the same time period.
Finally, we screened for bullish sentiment from institutional investors, with significant net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these names to outperform into the future.
Our final list consisted of 2 stocks. Do you think these names are poised to outperform? Use this list as a starting point for your own analysis. An additional data point is the performance of the Materials Select Sector SPDR Fund (XLB). The estimated 3-5 year EPS growth is 9.9%, and it has a year-to-date performance of 4.9%. Both companies mentioned below are expected to outperform the sector index.
1. Transocean Ltd. (RIG): Provides offshore contract drilling services for oil and gas wells worldwide.
- Market cap at $15.58B, most recent closing price at $49.36.
- Net institutional purchases in the current quarter at 24.1M shares, which represents about 7.4% of the company's float of 325.69M shares. The 2 top holders of the stock are Capital Research Global Investors, and Wellington Management Co.
- Revenue grew by 10.85% during the most recent quarter ($2,278M vs. $2,055M y/y). Accounts receivable grew by 1.1% during the same time period ($2,200M vs. $2,176M y/y). Receivables, as a percentage of current assets, decreased from 28.87% to 25.44% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
- 5-year EPS growth at 27%.
2. SandRidge Energy, Inc. (SD): Operates as an independent natural gas and oil company in the United States.
- Market cap at $2.29B, most recent closing price at $4.61.
- Net institutional purchases in the current quarter at 41.5M shares, which represents about 13.78% of the company's float of 301.07M shares. The 2 top holders of the stock are Riverstone Holdings, LLC., and Carlyle Group.
- Revenue grew by 257.93% during the most recent quarter ($1,338.1M vs. $373.84M y/y). Accounts receivable grew by 115.91% during the same time period ($445.51M vs. $206.34M y/y). Receivables, as a percentage of current assets, decreased from 46.7% to 38.98% during the most recent quarter (comparing 3 months ending 2012-12-31 to 3 months ending 2011-12-31).
- 5-year EPS growth at 15%.
*Institutional data sourced from Fidelity, all other data sourced from Finviz.