By Larry Gellar
Sophisticated investors can use high-beta stocks to improve their returns in a rallying market. In fact, we've identified five that should certainly be considered. Parker-Hannifin (PH), Textron (TXT) and Basic Energy Services (BAS) are industrial companies with good things going for them. Meanwhile, Monster (MWW) and International Game Technology (IGT) are two tech plays that will also see growth.
Parker-Hannifin Corporation has a beta of 1.51. The stock has gone from trading below $75 per share in December to its current price of over $81. Part of that can be explained by the terrific earnings report that was just released. In fact, Parker-Hannifin was able to set second quarter records for revenue ($3.11 billion, up 8.4% year-over-year) and net income ($240.8 million, up 4.6% year-over-year). This stock should benefit as the company adjusts its operations to cater to North America as opposed to Europe. Furthermore, compared to last year at this time, Parker-Hannifin was able to improve the performance of all of its segments besides climate industrials. This is especially important because it makes it very likely that Parker-Hannifin will have strong growth for years to come. Value metrics also look good for Parker-Hannifin. Price to earnings and price to sales ratios are both lower than other stocks like Eaton (ETN), Emerson Electric (EMR) and Honeywell (HON). As for cash flows, Parker-Hannifin had over $900 million of free cash flow in fiscal year 2011 and over $400 million of free cash in the two quarters after that. That, in turn, has helped the company buy back stock, and this trend should continue in the future.
Textron Inc. has a beta of 2.60. The stock has gone from trading below $18 per share in December to its current price of nearly $22. Textron is currently making a big push to expand into Canada, and the company just moved into a new building in Ottawa. That should help as the company attempts to win a project for the Canadian Forces' Tactical Armoured Patrol Vehicle. In fact, increasing military/police needs in Canada make this a prime opportunity for Textron. There have also been rumors that Textron will spin off some of its businesses soon. While the company's Bell Helicopter and Cessna Aircraft subsidiaries work well together, putting tool manufacturer Greenlee on the chopping block might make sense. Such a move would certainly add value to this company, and investors can profit by buying shares now. Compared to General Electric (GE) and United Technologies (UTX), Textron offers very low price/earnings to growth and price to sales ratios, which also helps to make this stock attractive. As shown by the statement of cash flows, Textron has been busy paying off debt, so the majority of this stock's returns will likely come from capital gains. With that in mind, General Electric or United Technologies might be more appropriate for dividend investors.
Monster Worldwide, Inc. has a beta of 2.22. The stock has made gains recently by moving up from $8 per share to $9. One recent announcement from the company has been its unveiling of College Pages for its Beknown app on Facebook. The new feature is essentially a way for students to network with alumni about possible job opportunities, and this could become highly popular in today's tough job market. Monster's continued innovation will also allow the company move beyond its own job-search web site and find new opportunities for career services. For example, the company is starting a trend of working with state governments on their career web sites. The newest state to work with Monster is Ohio, although there have also been partnerships with Indiana, Kentucky and some of California's local governments. While price to earnings and price to sales ratios are a bit high for Monster, investors should be willing to pay a premium for this fairly unique stock. Gross margin of 49.88% and operating cash flow of $125 million during the past three quarters are two more signs of a well-run business. Investors looking for more of a speculative play might consider LinkedIn (LNKD), which has more potential growth but also more risk.
Basic Energy Services, Inc. has a beta of 2.28. While this stock was trading for over $21 not too long ago, the stock price is now just over $17. This pullback has created a buying opportunity for Basic Energy Services, and investors should review some data that was just released by the company. Basic's services are in high demand right now because many of the oil companies that Basic works with are rapidly making new discoveries. Important statistics like fluid services truck hours and well servicing activity are growing quickly for Basic Energy Services. In that linked report, Basic Energy Service CEO Ken Huseman said, "Based on oil and gas price forecasts and discussions with customers, we expect continued strong demand for our services in oil and liquids-driven markets throughout 2012 but gas-related regions will likely remain subdued into 2013." We agree with those comments and believe this stock will rise during 2012. This stock is also attractive due to its low price to sales ratio (0.64) and strong gross margin (37.21%). With $23.69 million flowing into Basic during the past nine months, this company should be able to make some nice acquisitions as well by taking on more debt.
International Game Technology has a beta of 1.59. IGT stock was trading below $16 in December, but now the stock price is almost $17. The company has some exciting casino technology in the works, such as IGT Cloud. IGT Cloud brings cloud computing to the casino scene, and that type of innovation could send this stock skyrocketing in the future. The key here is that cloud computing would allow International Game Technology to deliver its services to more customers at a lower cost. International Game Technology is also acquiring Double Down Interactive, known for its addictive Facebook games. This company figures to be a good match for International Game Technology, and we like where this company's head is when it comes to mergers and acquisitions. On the other hand, International Game Technology will have to be careful with Double Down Interactive because the wrong moves could upset the casino companies that it sells hardware to. International Game Technology offers a low price to earnings ratio compared to Bally Technologies (BYI) and WMS Industries (WMS-OLD), which also helps to make the stock attractive. With $301.6 million flowing into International Game Technology during fiscal year 2011, we believe this company is operating very well.