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Richard Aster Jr. is the founder of Aster Investment Management Company and he manages both the Meridian Value Fund (MVALX) and Meridian Growth Fund (MERDX), which have made an annualized return of 11.4% over the last 25 years.

Aster uses a hybrid investment methodology where he invests in both growth and value stocks, with a view to achieving long term capital growth. In this article, I will analyze five recent stock picks by Aster to determine whether they represent astute investment opportunities that will continue to grow in value.

Advance Auto Parts Inc (NYSE:AAP)

Advance Auto Parts has a market cap of $4.91 billion and is trading at around $67, with a price to earnings ratio of 14.23. Its 52 week trading range is $49.50 and $72.32. It reported third quarter 2011 earnings of $1.46 billion, a decrease from second quarter earnings of $1.48 billion and the third quarter net income was $105.55 million, a decrease from the second quarter net income of $113.11 million. It has quarterly revenue growth of 4.2% and a return on equity of 39.21%. It pays a dividend with a yield of 0.4%.

One of Advance Auto Parts’ competitors is O’Reilly Automotive Inc (NASDAQ:ORLY), which has a market cap of $9.55 billion and is trading at around $74, with a price to earnings ratio of 21.42. It has quarterly revenue growth of 7.7% and generates a return on equity of 16.61%. This data indicates that, it is has better growth prospects than Advance Auto Parts but is generating an inferior return on equity.

Aster holds 728,340 shares of Advance Auto Parts, buying the entire holding in the third quarter 2011, at an average price per share of $57.85. Based upon the last trading price of $66.85, he has made a return of 15.56%.

Advance Auto Parts’ cash position has marginally declined in the last quarter. Its balance sheet showed $65.93 million in cash for the third quarter, a decrease from $68.82 million in the second quarter. Advance Auto Parts’ quarterly revenue growth of 4.2%, versus an industry average of 4.9%, and a return on equity of 39.21%, versus an industry average of 48.2%, indicates that it is under-performing many of its peers.

The outlook for the auto parts stores industry is cautiously positive with Moody's Investors Service revising the outlook from stable to positive. The key driver of this improved outlook is tentative signs of an improving US economy and the growing demand for vehicle parts. However, it is important to note that consumer discretionary spending has dropped as a result of the poor economic climate and negative consumer sentiment, and this discretionary spending has not recovered to pre-GFC levels.

Despite the positive industry outlook I do not believe that Advance Auto Parts represents a solid investment opportunity and I disagree with Aster’s investment decision. The company has recently reported decreased earnings, net income and cash holdings for the third quarter 2011. On this basis I rate the company as a hold.

Denny’s Corporation (NASDAQ:DENN)

Denny’s has a market cap of $320.89 million and is currently trading at around $3, with a price to earnings ratio of 15.14. Its 52 week trading range is $3.11 to $4.37. It reported third quarter 2011 earnings of $136.68 million, an increase from second quarter earnings of $135.85 million. Third quarter net income was reported at $7.99 million, a decrease from second quarter net income of $8.13 million. It has quarterly revenue growth of -2.30%.

One of Denny’s closest competitors is DineEquity Inc (NYSE:DIN), which has a market cap of $772.25 million and last traded at around $43. It has quarterly revenue growth of -21.20% and a return on equity of -1.97%. Based on these indicators both companies are performing approximately on par.

Aster holds 1,135,700 shares in Denny’s, with the entire holding bought in the third quarter 2011 at an average price per share of $3.75. Based on the last trading price of $3.15 he has made a return of -16%.

Denny’s cash position has improved in the last quarter. The balance sheet showed $14.95 million in cash for the third quarter an increase from $12.94 million in the second quarter. Denny’s quarterly revenue growth of -2.30%, versus an industry average of 9.3%, and no return on equity, versus an industry average of 29.6%, indicates that it is under-performing many of its competitors.

The earnings outlook for restaurants remains positive despite the poor economic climate, high unemployment and negative consumer sentiment. It was recently reported by the National Restaurants Association that restaurant operators have reported a net increase in traffic and positive same store sales growth.

Despite the positive industry outlook I find it difficult to understand Aster’ decision to invest in Denny’s, on the basis that the company has weak performance indicators and reported a decrease in both earnings and net income for the third quarter 2011. It is also difficult to see a recovery in short term earnings as consumer discretionary spending has dropped considerably given the poor economic outlook, high unemployment and negative consumer sentiment. Accordingly, I rate Denny’s as a hold.

Safeway Inc (NYSE:SWY)

Safeway has a market cap of $6.37 billion and currently trades at around $18.50, with a price to earnings ratio of 12.55. Its 52 week trading range is $15.93 to $25.43. Third quarter 2011 earnings of $10.06 billion was reported, a decrease from second quarter earnings of $10.20 billion. Third quarter net income was $130.10 million, a decrease from second quarter net income of $145.90 million. It has quarterly revenue growth of 7.1%, and a return on equity of 11.27%.

One of Safeway’s competitors is SuperValu Inc (NYSE:SVU), which has a market cap of $1.53 billion and is trading at around $7, with a price to earnings ratio of 54.36. It has quarterly revenue growth of -2.6%, a return on equity of 1.83% and pays a dividend with a yield of 4.7%. Based on this data Safeway is outperforming SuperValu.

Aster holds 26,000 shares in Safeway, with the entire holding purchased in the third quarter 2011 at an average price per share of $19.33. Based on the last trading price of $18.37 he has made a return of -4.97%.

Safeway’s cash position has improved, with the third quarter balance sheet showed $180.50 million in cash, an increase from $150.90 million in the second quarter. Safeway’s quarterly revenue growth of 7.1%, versus an industry average of 11.4%, and a return on equity of 11.27%, versus an industry average of 13.6%, indicates that it is underperforming many of its competitors.

The outlook for the grocery store industry is cautiously optimistic, despite the poor economic outlook, high unemployment and negative consumer sentiment. This can be attributed to the demand for many grocery products being relatively inelastic as well as tentative signs of some improvement in the economy.

Safeway is currently trading at well below its 52 week peak, and I believe this represents a buying opportunity despite the third quarter decrease in earnings and net income, as Safeway possesses a strong franchise and brand presence, has a increased its cash holdings and has solid performance indicators. Accordingly, I agree with Aster’s decision to invest in the company and rate it as a buy.

SBA Communications Corporation (NASDAQ:SBAC)

SBA Communications has a market cap of $4.15 billion and is currently trading at around $38. Its 52 week trading range is $32.36 to $44.44. It reported third quarter 2011 earnings of $175.55 million, an increase from second quarter earnings of $171.05 million. Third quarter net income was -$33.31 million, a decrease from second quarter net income of -$29.82 million. It has quarterly revenue growth of 10.7% and a return on equity of -69.83%.

One of SBA Communications competitors is American Tower Corporation (NYSE:AMT), which has a market cap of $21.78 billion and is trading at around $55, with a price to earnings ratio of 80.32. It has quarterly revenue growth of 22.8%, and a return on equity of 7.91%. Based on these indicators it is outperforming SBA Communications.

Aster holds 1,517,645 shares in SBA Communications, purchasing 529,430 shares in the third quarter 2011, adding to an existing holding of 988,215 shares. The average purchase price per share is $39.85. Based on the last trading price of $37.40 he has made a return of -6.15%.

SBA Communications’ cash position has declined in the last quarter. The balance sheet showed $204.03 million in cash for the third quarter a decrease from $301.71 million in the second quarter. The net tangible assets have decreased to -$1.54 billion in the third quarter 2011, from -$1.44 billion in the second quarter. SBA Communications’ quarterly revenue growth of 10.7%, versus an industry average of 13%, and a return on equity of -69.83%, versus an industry average of 5.9%, indicates that it is under-performing many of its peers.

The earnings outlook for the telecommunications rental and leasing services industry is quite positive. Increased demand triggered by sustained growth in the wireless communications industry will see greater demand for infrastructure such as wireless telecommunications towers. This bodes well for those companies who are engaged in manufacturing and maintaining communication towers such as SBA Communications.

Despite the positive industry outlook I do not agree with Aster’s decision to invest in SBA Communications as the company has reported a decrease in net income and balance sheet cash. In addition, the company has less than attractive performance indicators and these do not bode well for any future increase in earnings and net income. Accordingly, I rate the company as a sell.

Family Dollar Stores Inc (NYSE:FDO)

Family Dollar Stores has a market cap of $6.74 billion, and is currently trading at around $57. Its 52 week trading range is $57.27 to $58.42. It reported third quarter 2011 earnings of $2.13 billion, a decrease from second quarter earnings of $2.15 billion. Third quarter net income was $79.85 million, a substantial decrease from the second quarter net income of $111.10 million. It has a quarterly revenue growth of 9.1%, a return on equity of 30.97% and pays a dividend with a yield of 1.3%

One of Family Dollar Stores’ competitors is Dollar Tree Inc (NASDAQ:DLTR), which has a market cap of $9.12 billion, a price to earnings ratio of 20.42 and is trading at around $77. It has quarterly revenue growth of 11.9% and a return on equity of 32.38%. Based on these performance indicators it is outperforming Family Dollar Stores.

Aster holds 1,056,930 shares in Family Dollar Stores, purchasing 323,685 shares in the third quarter 2011, to add to an existing holding of 733,245. The average purchase price per share is $36.47. Based on the last trading price of $55.90 he has made a return of 53.28%.

Family Dollar Stores' cash position declined in the last quarter. The balance sheet showed $141.41 million in cash for the third quarter 2011 a decrease from $167.43 million in the second quarter. Family Dollar Stores quarterly revenue growth of 9.1%, versus an industry average of 6.9%, and a return on equity of 30.97%, versus an industry average of 22.2%, indicates that it is outperforming many of its peers.

The outlook for the discount variety store industry is quite positive despite the poor economic outlook, high unemployment and negative consumer sentiment that are affecting many other sectors of the retail industry. This outlook can be attributed to variety stores being able to capitalize on the recession, with more consumers looking for deep discounts, which should see dollar and variety stores performing well by targeting low income households and thrifty customers.

The positive industry outlook demonstrates that this segment of the retail sector will experience increased earnings. When this is considered in conjunction with Family Dollar Stores solid performance indicators, I believe that it represents a good investment opportunity despite its recent decrease in net income and cash holdings. Accordingly, I agree with Aster’s investment decision and rate the company as a buy.

Source: Guru Investing: 5 New Big Buys From Richard Aster