By Scott A. Mathews
With markets running left and then right, the stage is set for new faces to prove their mettle. Below are some stocks we believe may become bellwethers in their respective niches. From LED lights to auto supply chains, we believe these names could become the name in their fields. All the stocks on this list have PEG ratios of less than 1.5; most fall under 1. Here they are:
Ultra Petroleum Corp. (UPL) | Energy | Oil & Gas E&P
The lowest cost-per-unit producer on the continent, Ultra has a PEG ratio of 0.58, implying an undervaluation that is generally confirmed by analysts relative to where it is currently trading. Add to that the superior structure of its reserves and Ultra, with the right management, could navigate through the crowd of North American players to pioneer the group. That said, natural gas being a highly regional game, it is difficult to call a traditional bellwether per se. Regardless, the company has an undervalued natural gas reserves, as we detailed here. The Green River Basin, where UPL has significant experience producing gas and selling through the Rockies Express pipeline, is a promising multi-layer zone with deeper zones likely to add significantly to existing proved reserves. UPL has well over 100 exploratory wells in the Marcellus with a third already producing gas for sale. We think a buyout would come in around $10-11 billion including debt, or above $60 per share.
Copart Inc. (CPRT) | Industrials | Industrial Distribution
Copart creates the marketplace for, as well as provides the services to bring to auction, salvaged vehicle parts. It has steady EPS growth over the 1-, 2- and 5-year spectrums. As commodities prices rise, the services of Copart could increase the size of its niche role within the automotive-salvage space. Though we like Copart management, we believe these five management teams are the best in the industrials space.
Amphenol corporation (APH) | Technology | Electronic Components
This connector company, currently the No. 2 global player, is presenting a very attractive picture, both quantitatively and qualitatively. Delivering an industry topping 20% operating margin with a culture of cost-cutting, it seemed to suggest, when it released earnings information, that it anticipated continued aggressive growth in earnings. Deutsche Bank (DB) and Longbow have both come out with Buy ratings for the stock and target prices in the mid-$60 range. The name of the game for Amphenol is execution, and this has defined it. Add to this a diversified portfolio with particular strength in the high-end defense space and Amphenol could soon be the look-to name in the connector industry.
Cree Inc. (CREE) | Technology | Semiconductors
LED lighting is a new dimension in the green energy space and Cree is its technological leader. LED lights are now being considered for wider use, chiefly in industrial applications and likely more areas to be defined. If this is the direction LED takes, then CREE will likely see the bigger conglomerates start to crowd in. However, its longstanding technological prominence could easily hoist it up to bellwether status. If you believe in LED, you might keep your eyes tuned to Cree.
Atwood Oceanics (ATW) | Energy | Oil & Gas Drilling
With a PEG of 0.79, Atwood Oceanics is growing aggressively. Its fate is linked to the success it has contracting with oil industry majors to extract in mostly international territories. While small compared to some of its competitors like Transocean (RIG) and Diamond (DO), it is sitting on top of an extremely healthy balance sheet that provides plenty of dry powder for its ambitions.
CTC Media Inc. (CTCM) | Technology |Broadcasting (Russia)
An extremely low PEG ration of 0.51 and a massive dividend at 6.2% make this Russian media darling pop to our eyes – as well as the eyes of 100+ million Russian television viewers. It's one of the largest Russian media companies, with a 37% rise in stock price over the past 12 months and sustained, bounding growth projection for EPS. Media and politics don’t always mesh well in Russia, but notwithstanding an incident, the numbers suggest that this name that is in Russian homes daily may soon find its way onto the lips of investors. CTCM is also one of our 13 emerging market dividend stocks worthy of a closer look.
Dollar Tree Stores Inc. (DLTR) | Consumer Defensive | Discount Stores
Barclays (BCS) is the latest, following on the coat tails of UBS and RBC Capital Markets, to endorse this discount retailer that has grown EPS by over 17% in the past year. As the economy and -- most relevantly -- unemployment remain ugly, the demand for DLTR’s offerings will remain high. With a national presence, it could be the name to follow in the discount stores arena.
Atheros Communications (ATHR) | Technology | Semiconductors
Atheros has led the charge in the WLAN space in the past five years, thus bringing it to prominence. This trend looks likely to widen and deepen as WLAN networks are now evolving into city-wide and region-wide coverage zones. This has cemented the company’s position, but to elevate it further to potential bellwether status, Atheros is going to need to diversify its portfolio, especially given the quickly evolving nature of its competitive space.
Fossil inc. (FOSL) | Consumer Cyclical | Footwear & Accessories
Trading with a PEG ratio of 1.16, Fossil sells its eponymous watches along with several other moderately priced watch brands. Its earnings per share have grown continuously over the past five years at a rate of about 30% and EPS estimates for 2011 are nearer to 90% with a five-year forward-looking projection falling back in line with its history of EPS growth, near about 20%. One day, Fossil could be one of the consumer brands paying a 3% dividend or more.
Gildan Activewear (GIL) | Consumer Cyclical | Apparel Manufacturing
Apparel has been a deflationary space for nearly two decades, but this year signals a break with this tradition. Riding this wave, North American apparel manufacturer Gildan has capitalized as wholesalers restock. The three prongs of its strategy that have led it to prominence in North America and could help establish it more broadly are an emphasis on products with high volume orders, manufacturing in low-cost markets, and a continuous investment in technological upgrades. The company’s PEG is just under an even 1.
O’Reilly Automotive Inc. (ORLY) | Consumer Cyclical | Specialty Retailer As O’Reilly continues the successful integration of CSK, part of a strategic growth plan, it maintains a PEG ratio of 1.16. Healthy financials and good strategic management may make the difference in promoting O’Reilly to the head of the class in its market niche. With the automotive industry announcing earnings this week, O’Reilly should be on your radar.
Open Text Corp. (OTEX) | Technology | Software Application
Experiencing a strong run since July 2010, accentuated in recent days, the stock of Open Text has performed well. Even so, RBC Capital Markets recently upgraded it to Outperform with a target of $65, which it is striding towards. Using acquisitions and strategic partnerships, Open is charting a course for growth, though it is not free from danger. EPS are expected over 40% this year and leveling to a five-year projection of just over 20% a share. Anyplace where bureaucracies and organizations are launching new pushes for data efficiencies, OTEX can position for continued ascendance in the Enterprise-Content Management (ECM) space.
United Therapeutics Corp. (UTHR) | Healthcare | Biotechnology
A hyperbolic, 413% EPS growth projection for 2011 is a good headline. However, its ability to reach bellwether status will depend on how well it can repeat its innovative successes and continue to bring demand-heavy, defensible products to market. It’s too small to a healthcare stock that Buffett might buy, unlike these five names.