By Lucas Scholhamer, Guest Editor
Jeremy Grantham’s bearish approach to value investing has led to significant success for his Boston-based asset management firm, GMO. We continue our in-depth analysis of some of this guru’s most recent buy ideas:
Insight Enterprises Inc. (NSIT): This Arizona-based Fortune 500 company resells computer hardware and software and offers IT consulting services to companies across the nation. Shares depreciated 1.93% to $16.74 at the time of writing. NSIT stock value has hovered around the $17.10 range since it spiked to its YTD high of $19.10 in mid-February. Shares have a trailing P/E ratio of 10.1, considerably lower than many in the technology/IT sector. In its recent first-quarter report, NSIT reported an astounding 43% year-over-year increase in profits, from $9.2 million profit on $1 billion revenue in the first quarter of FY 2010, to $13.1 million in profits on $1.2 billion revenue this quarter.
I believe that NSIT stock is a good buy. Forrester Research recently named Insight Enterprises a “Key Player in the Software Reseller Market.” NSIT continues to profit from the ever-increasing demand to replace quickly evolving technology, despite the fact that electronic delivery of software has rendered many delivery services unnecessary. The company has been able to compensate for this by offering custom technology solutions for businesses and establishing a presence in fertile foreign markets in the United Kingdom, Asia, and Australia, effectively positioning itself for long-term growth.
On the other hand, target price estimates are averaging between $17.00 and $18.00, suggesting only minimal share appreciation in the near future. It is hard to estimate how soon NSIT will break its next resistance level, but for those with long-term goals (such as Jeremy Grantham), this stock could be a winner.
Wisconsin Energy Corporation (WEC): This utilities company, based in Milwaukee, provides energy to customers throughout Wisconsin and the upper peninsula of Michigan. Shares appreciated $0.02 to $31.57 at close on Monday, up 0.06% on the day and 7.2% on the year to date. WEC stock has a P/E ratio of 15.06, and an attractive 3.3% dividend yield. The company announced that profits for Q1 increased to $177 million (72 cents per share), from $129 million (55 cents per share) for the same quarter last year, largely due to a colder-than-average winter and the completion of the company’s $3 billion Power the Future plan for improving the area’s energy infrastructure.
I recommend buying WEC stock. Although the explosive rate of growth Wisconsin Energy experienced in Q1 is likely not sustainable, the improved production capacity and reliability of the energy infrastructure resulting from the Power the Future initiative should ensure more efficient operation and, thus, greater profitability for the company. Additionally, the 3.30% dividend yield (approximately 26 cents per share) is especially enticing, and WEC’s growing cash flow suggests that the company should have no problems paying out or even increasing the dividend yield in the future. Price target estimates are averaging around $33.00, so while this stock may not be a blockbuster, it has great potential for stable, slow growth—the kind that Jeremy Grantham seems most comfortable with.
I think that with the completion of the Power the Future plan, WEC may struggle with continuing to grow at a competitive rate, as the region no longer needs to invest in improving the power infrastructure. Additionally, with the company’s performance being impacted so significantly by weather, Wisconsin Energy could be vulnerable if we see a warmer winter in the Midwest this year.
Weis Markets, Incorporated (WMK): Weis Markets, Inc. operates a chain of 162 retail grocery stores in the New England area. WMK stock fell 1.11% to $40.89 upon closing on Monday, continuing to fall off its 52-week high of $41.82 achieved last week. Its 52-week low is $32.56. Shares have a P/E ratio of 15.8 and a considerable 2.81% dividend yield. From the 10K, the company’s year-over-year Q1 net income increased 7.0% to $18.6 million, according to WMK’s recently released earnings report.
I recommend holding WMK stock. The company attributes its Q1 growth to increased efficiency at its stores as well as effective marketing. During this period, DMK divested 20 unprofitable or underperforming SuperPetz and Weis market stores, which resulted in a slightly lower figure for total sales in Q1, but dropping this deadweight should ultimately decrease operating costs and promote profitability in the near future. According to CEO David J. Hepfinger, this is the 9th straight quarter of strong operating results. However, these factors may paint an overly optimistic picture. While trimming the fat by closing 20 stores will help increase profitability immediately, it is somewhat unsettling that approximately 1 out of every 9 stores operated by WMK were deemed unprofitable in the first place. This could be the result of changing market dynamics, as wholesale retailers, convenience stores, and specialty grocers are increasingly able to beat traditional supermarkets at affordability, convenience, and selection, respectively. WMK looks to be positioned for profitability in the short run, but long-term prospects may not be as promising.
Textainer Group Holdings, Ltd. (TGH): Textainer has been leasing and selling shipping containers since 1979. TGH owns over 1.6 million containers, leasing them to over 400 shipping lines worldwide, and the company claims to be the world’s largest seller of used containers. Shares depreciated $0.98 (3%), closing at $31.72 at the time of writing. TGH stock hit a YTD high of $37.87 in early April, and prices have declined since then. Shares have a P/E ratio of 12.2 and a dividend yield of approximately 3.79%. From the latest quarterly report, the company acquired an additional 98,000 Twenty-foot Equivalent Units (a TEU is essentially the size of a standard shipping container), which led to a 31% increase in total revenue compared with Q1 of FY 2010.
I believe investors should buy TGH stock. Shares have been appreciating steadily since 2009, including a recovery from an August 2010, dip of approximately the same magnitude as the current downtrend. Furthermore, the current share depreciation comes on the heels of a quarter in which manufacturing of TGH containers at Chinese plants was delayed due to wage negotiations, so this month’s fall may merely be a delayed expression of the effects of a kink in the supply chain. Additionally, this industry leader is benefitting from a worldwide shortage in shipping containers, and the high demand has led to the utilization of 98.2% of TGH’s current fleet of crates and increased sales of used containers. Additionally, the board of directors approved a $0.02 increase in the dividend yield, up to $0.31 per share, continuing the trend of growing dividend rates each quarter since the 2007 IPO. With price target estimates averaging about $40.00, this is a valuable opportunity for investors to add TGH stock to their portfolios.
Some are concerned that it may be at least another month before TGH pulls out of its current downtrend, suggesting that it might not be profitable to immediately invest for the short term. However, with the high demand for product, market conditions appear to be conducive for growth in the long run.
InterActiveCorp (IACI): InterActiveCorp owns and operates various websites, including the popular Ask.com and Match.com, among several others. Shares depreciated to $34.21 at close on Monday, continuing a fall off the YTD high of $36.93 achieved earlier this month. IACI stock carries a forward P/E ratio of 16.8. In its April 27th report of Q1 results, the company announced a first-quarter profit of $18.1 million, a significant year-over-year improvement over the $18.7 million loss IACI encountered in Q1 last year. Perhaps most importantly, IACI renewed its lucrative toolbar-search deal with Google (GOOG), which will pay the company $5.5 billion over 5 years after the current contract expires in 2012.
I believe IACI could be a good buy when the price is right. The extension with Google is huge, as the current $3.5 billion contract is a significant source of income for IACI. Also, from the 10K, with the increasing prevalence of smartphones, the number of subscribers through mobile devices grew 135% year-over-year, which went hand-in-hand with the 50 million apps downloaded in the last 12 months (mostly for the Match.com website). These apps could prove to be a valuable source of revenue in the future, as mobile subscribers now make up around 30% of Match.com users—a trend that could be echoed with some of IACI’s other websites as the proliferation of internet phones continues throughout the country. Price target estimates average around $41.00, and with shares falling below their recent support level close to $35.00, we could see prices drop to an even more affordable level in the near future.
On the contrary, many are worried that IACI’s aggressive acquisition approach to growth is risky, as overpaying for a company could hurt share values. This may help explain the current decline in stock prices, which intensified after IACI announced the acquisition of BuzzLabs, a social media monitoring website, on May 5th. Furthermore, profits from the company’s contract with Google help to hide any losses from IACI’s less successful websites, so some critics are skeptical about the overall truth of the optimistic picture presented in quarterly reports.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.