RPC, East West Bancorp and Limited Brands: This Week's 3 Most Intriguing Stocks

Includes: EWBC, FOSL, LB, RES
by: Stephen Castellano

Friday's 1.18% decline in the S&P 500 has generated some concern among market participants. Investors nervous about the huge gains racked up over the last three months have finally found an excuse to sell in the form of expectations for an interest rate increase from China and sovereign default risks in Ireland.

Our theoretical model portfolios, including a long-only model based on real trade data, did not hit their MTD target and so remain long. At this point we still see no sense in overriding the models and closing out the portfolios. Individual corporate profits are too strong for us to be fully convinced that we will be seeing a sustained market correction. Our models and personal investment style are based on data and not sentiment. This has advantages and disadvantages but has worked well for us over time on average.

This week, 60 stocks make our weekly "high-quality" list up from 57 last week, with 13 additions and 15 deletions. Thirty four stocks make the "low-quality" list, up from 30 last week with 10 additions and 6 deletions. Barring any market selloff, the most interesting name to appear on our "high-quality" list this week is a small-cap idea in the Energy sector, RPC Inc. (NYSE:RES). East West Bancorp, Inc (NASDAQ:EWBC) and Limited Brands, Inc. (LTD) also look good to us.

RPC Inc.
RPC Inc.
is a $2.6 billion market cap oil and gas services company that offers technical and support services to other oil and gas companies. Its Technical Services division provides pressure pumping, coiled tubing, snubbing, nitrogen pumping, well control consulting and firefighting and other services. Its Support Services segment offers equipment and services, including drill pipe and related tools; pipe handling, inspection, and storage services; and oilfield training services and others. The stock is up more than 50% over the last three months, likely driven in part by an almost 50% surge in revenue growth and a doubling in EBITDA over the last 12 months. Barring any worsening global energy and materials correction in the short term, it seems likely that RES has a good chance of continuing to outperform. Only four sell side analysts cover this company that we are aware of. A 3-for-2 stock split is scheduled to go in effect on December 10 and it pays a small dividend. The stock closed at $25.90 on November 12, down 2.19% for the day on 530,000 shares traded.

East West Bancorp, Inc
East West Bancorp, Inc. is not new on our list, but it is a small cap bank stock ($2.6b market cap) that has consistently held high across-the-board rankings in recent weeks. On October 25, the company reported better than expected earnings for its latest quarter and raised guidance for its next quarter. ROE is improving, non-conforming loans are declining and it trades at 1.3x tangible book value. That is a discount to a mean of 1.85x of ten other small-cap regional banks we quickly took a look at. Thirteen sell side analysts cover this company and their mean target is $20. Good relative value versus improving fundamentals make a compelling case for this idea.

Limited Brands (LTD)
On occasion we come across a potentially interesting short-term rebalancing idea. This week it is Limited Brands, which reports after the close on Wednesday, November 17 with a conference call scheduled for the next morning. Everyone is already expecting a good quarter and raised guidance from LTD, it is only a question of how much. Normally such a situation would not interest us because such heightened expectations are usually already fully priced into the stock. However, we note that Fossil, Inc. (FOSL) was facing much the same situation when it reported last week but still ended up closing up nearly 6% the day of its positive report. While LTD is 2.5x the size of FOSL in terms of market cap, and additionally LTD pays a dividend and carries net debt, they have closely ranked quantitative profiles. It might be worthwhile for portfolio managers looking to rebalance out of a losing stock idea and replace it with LTD in the short-term.

Disclosure: Long FOSL, EWBC