'Lean Inventory' Stocks Continue to Outperform the Market

 |  Includes: BC, BTH, CAA, HD, JWN, MHK, NWL
by: Brendan Wagner

On March 24th I ran a screen looking for "lean" inventory planning, after seeing companies like A.O. Smith beat earnings estimates handily due to overly conservative inventory levels contributing to higher margins:

I ran a more comprehensive screen of companies whose inventories as a % of revenue in their most recent quarter was at multi-year lows. In addition to that, the year over year change in inventory is below the expected change in revenue for the upcoming quarter. These companies should be able to meet expectations if things go about as well or slightly worse than planned, thanks to their conservative planning. If sales come in stronger than expected, however, the lean inventory position could enable some big earnings beats.

As expected, this list of stocks has outperformed significantly in the period since then, rising 8% on average versus a 1/3rd of a percent rise in the S&P500, in just 34 trading days. (Click to enlarge)Click to enlargeThe key here is to look for companies that not only have tight inventory, but inventory that looks overly tight compared to what Wall Street is looking for in upcoming quarterly sales. For instance, housewares (candles, fragrances, etc) firm Blyth (NYSE:BTH) ended the January quarter (fiscal Q4) with inventory down 29% from the year ago period, while April (fiscal Q1) revenue was expected to be down just 1%. The cautious planning led to higher-priced selling and thus better margins, allowing Blyth to report earnings per share of $2.59 versus the expected $2.00. Shares are 65% higher.

This is a repeatable investment process, and I'll be back with a list of firms who've planned conservatively for the June quarter, once we wrap up this earning season. I didn't include tech hardware last time, but I will going forward.

Click to enlargeDisclosure: No position