By Landon Brace
The founder of Century Management, Arnold “Arnie” Van Den Berg is a true value investor. By seeking out undervalued securities he has been able to consistently beat the market. Due to his strategy of investing in companies at a significant discount to their true value he allows room for error while preserving capital. If you’re looking for a holiday bargain it may be worth considering the following five stocks.
Encore Wire Corporation (WIRE) – Encore is one of Arnie’s brand new purchases. For the quarter ended September 30, 2011 he holds a total of 552,622 shares at an average cost of $22.53. Based on the current share price he is already up over 10% on his investment, but the question is whether there are further gains to be had. Encore’s yearly high of $28.50 was set back in April and it is well off it’s low of $19.69 set in September. As a manufacturer of copper wire and cable, Encore’s entire business model hinges on raw material costs. Encore’s gross margin of 10.46% is well below the industry average and it’s P/E of 15.76 is five points above competitor Belden Inc. (BDC). With the cost of copper starting to ease over the past several months, margins could be positively impacted. If copper prices continue their trend, a dividend increase could be around the corner. The current yield of 0.30% is in line with competitors, and is a plus for this fast grower. Before the board approves a dividend increase there must be absolute certainty of its long term sustainability which, once again, hinges on raw material prices. I am bullish on Emcore's prospects, given the favorable macro environment for its business.
Universal Forest Products Inc. (UFPI) – Another new buy in the third quarter of 2011, Mr. Van Den Berg acquired 429,521 shares of Universal Forest Products at an average cost of $27.00. At the current price of $28.15 he has already achieved a 4% gain on his investment while still quite a ways from the yearly high of $39.84 set in January. As a holding company strategically focused in the building materials area, material costs of lumber are the driving force of the bottom line. With a gross margin of 11.15%, well below the industry average of 33.26%, it is safe to say that Universal is feeling the pain of the housing slow down as well. The consistent dividend is one bright spot worth pointing out as competitors Lousiana Pacific Corp. (LPX) and Bluelinx Holdings Inc. (BXC) fail to deliver in that area. When housing starts begin to improve and some solid evidence of construction spending become prevalent Universal is poised for greatness. With the few words of positivity being said about the state of housing lately, I take a contrarian view. I am bullish on UFPI given that expectations are so low. On a DCF basis, investors would have to expect 0% to -1% growth from here into perpetuity at the current share price. I think that is short-sighted and would buy at these levels.
VCA Antech Inc. (WOOF) – VCA Antech was purchased for the first time by Mr. Van Den Berg in the third quarter of 2011 for an average price of $18. His total holdings of 592,730 shares have already appreciated in value by 10% and there could be room to grow. VCA Antech is off its recent yearly low of $14.73 set in October and is quickly gaining a name as a growth hungry player in the veterinary industry. With its recent acquisitions of Pet DRx and MediMedia Animal Health LLC, VCA Antech is planning for long term success with significant rewards for shareholders. With a P/E of 14.36 VCA Antech is well below competitors IDEXX Laboratories, Inc. (IDXX) and PetSmart Inc. (PETM). VCA Antech’s 10% quarterly earnings growth is also a strong sign that their acquisitions have been positive for business. It is well known that the amount of seniors is increasing more rapidly then in the past and the healthcare industry is poised for growth. VCA Antech covers the healthcare angle in a way not previously examined. Thus, it is uniquely positioned and an early mover in the veterinary care space. Basing an investment on more seniors splurging on special treatment for their beloved pet may seem like a long shot in theory, but the numbers seem to tell VCA’s story by themselves. As a contrarian, I recommend buying VCA now.
Jacobs Engineering Group Inc. (JEC) – Arnie has been purchasing shares of Jacobs consistently since the first quarter of 2010. In the third quarter of 2011 he made his largest purchase yet, 1.1 million shares at an average cost of $37.33. The company is well off it’s yearly low of $30.74 set back in October and has returned Arnie 13% at its current price of $42.05. The company is an acquisition power house, making 8 acquisitions in the last two years, most recently, Unique World. The slew of acquisitions has definitely helped fuel their quarterly earnings growth of over 16% and it’s P/E of 16.17 is slightly below competitor Fluor Corporation (FLR). The diversification of Jacobs business makes it a perfect contender for the current business environment. Even though we can expect the amount of orders from governmental clients to slow, its numerous other areas of expertise should more than make up for the drop in that area. Further acquisition opportunities will be key for Jacobs if it plans to continue to fulfill investors strong appetite for growth. Although Jacobs boasts solid fundamentals, don’t expect a dividend anytime soon. All cash flow must be funneled back into the business for expansions and investments in order for the company to continue to delight shareholders. Seeking a dividend from this fast grower, as some investors do, is short-sighted. JEC has some of the best engineers in the business, and, knowing the engineering field, innovative, creative engineers are hard to come by. JEC is in a great position to meet international demand for large-scale engineering services even if the economy muddles along.
Steelcase Inc. (SCS) – Mr. Van Den Berg made his largest purchase of Steelcase yet with over 2.1 million shares purchased in the third quarter of 2011. At $7.75, The office furnisher is right between it yearly low of $5.40 and high of $12.12. Operating margins continue to feel the squeeze of the economic downturn, and at 4.71% they are more then 30% below the industry average. With the current employment situation still looking grim, office furnishings aren’t in strong demand. The crisis in Europe and depressed government spending in the USA has continued to disparage future revenue growth opportunities for Steelcase. When Steelcase is finally able to increase volumes, some of the higher raw material costs they have had to absorb may be able to be passed on. Although it has been said that the vacancy rates of commercial real estate have peaked, it may be a few quarters until Steelcase feels the benefits. Nonetheless, the price is good at current levels. This was a valuation pick on the part of Mr. Van Den Berg. On a discounted cash flow basis, using a 10% cost of equity for shares, I value Steelcase at $11 per share. Buyers can get significant upside from here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.