This is the third monthly installment in our "Shadow Stock" series. For those new to this concept, we will revisit the introduction to the series.
I first heard of "shadow" companies in the '70s. The Wall Street Journal would report that Texaco hit a gusher in some Oklahoma county. The goal was to find a supply company or driller working in the "shadow" of the Texaco rig that might indirectly benefit from the news.
Before computers and internet, my best resource for stock information was the Moody's alphabetized volumes at the public library. They were thick 3-ring binders, each with thousands of tissue-paper pages of 4-point type. The better way to find the "shadow" stock would be for someone to drive to Oklahoma and read the brands on the trucks lined up outside the local diner. With the magic of the internet and screening filters, it is possible to detect growth companies that "shadow" established, well-known blue chips in some shared characteristics: business model, cash flow, revenue source, etc.
Our February article had emphasis on high-dividend payers, and March's focus was high-revenue growth. This article will discuss two shadow stocks in the Truck Manufacturing and Surgical Robotics industries, with an emphasis on extraordinary value.
Before introducing our selections for this month, lets take a quick look at how our previous suggestions have fared:
Tellular Corporation (WRLS) - $ 8.71 is up 7%. It reported great earnings, increased dividend, which yields 5.2% annually. Industry: Wireless Communications.
Homeowners Choice (HCII) - $12.33 is up 16%. It reported great earnings, increased dividend, which yields 6.3% annually. Industry: Property Insurance.
Ocean Bio-Chem (OBCI) - $2.25 is down 5%. Earnings were impacted by repackaging and marketing costs. Hinted that first quarter may be slow due to warm weather affecting snowmobile product sales. Industry: Special Chemical Products.
Crimson Exploration (CXPO) - $4.12 is up 24%. Announced a 1200 BOE discovery in a new 17,500 acre field that would add "incremental value of $5 per share" per the company. Industry: Petroleum Exploration.
A portfolio of $4000 invested equally in each of the four past Shadow stocks at the time of their selection would have grown to $4422, with an average holding period of 5 weeks. The S & P would have grown to $4132, and the same investment in the "blue chips" that the shadow stocks mimic would only have yielded $4066. Despite their price increases, we still consider those previous four shadow stocks to be good value propositions. Although some of these have popped nicely, they are actually intended for long-term investments and not quick trading profits.
Now lets look at this month's selections.
Core Molding Technologies (CMT) - $9.23 engages in the manufacture and sale of sheet molding compound (SMC) products in the United States, Canada, and Mexico. The company sells its products for various markets, including medium and heavy-duty truck, marine, automotive, and other commercial products.
The truck manufacturing business is normally volatile, and the good times are too frequently short-lived. However, in 2011, it has been quietly having a robust recovery as emerging markets have created strong demand for light and heavy trucks. In the US, as freight activity picks up and the aging vehicle fleet of commercial and public vehicles is replaced, the industry will be presented with substantial opportunities for continued stable growth.
In the past year, the mammoth truck manufacturer Paccar (PCAR) has seen its stock approach the all-time highs around $60. It has since dropped back to the $46 level with the general market, but analysts are predicting double-digit sales growth for PCAR in the next two years. While we like PCAR, we want to try to improve on the value metrics of PE of 16 and share price that is 3 times book value.
Core Molding's primary market is truck manufacturers and we consider it a "shadow" stock for PCAR. Its current PE is only 6.4 and it sells at a measly 30% premium to book value. While PCAR gets $1 revenue for each dollar of share price, CMT earns $2 sales for each dollar of capitalization. Although our theme this month is value, it is notable that in the last quarter CMT reported 52% sales growth year-over-year and 40% EPS growth, on slightly more shares. Finally, insiders are buying shares.
Allied Motion Technologies, Inc. (AMOT) - $7.25 designs, manufactures and sells motion products to a broad spectrum of customers throughout the world. Although its products are used in a variety of industries the first one mentioned in its annual report is Surgical Robots. CMT also makes precision motors and instruments for use in surgical tools.
During the past year, Intuitive Surgical (ISRG) has steadily risen to its current all-time high of $545 per share as its surgical robot and tools sales have been growing at a 20% clip, and are expected to continue that pace into the foreseeable future. We are impressed with ISRG's growth and business prospects, but we are not willing to chase its shares at a PE of 44 and 8 times book value.
We are more inclined to participate in this market through the shadow stock, Allied Motion, with a PE of 9 and price less than twice the book value. While ISRG gets 9 cents in sales per dollar of capitalization, AMOT generates $1.80 per dollar of share price.
In its last quarter, AMOT reported 38% year-over-year revenue growth and a 58% EPS improvement, exclusive of one-time gains. AMOT pays a 1.4% dividend yield which is 1.4% more than ISRG.
It should be noted that these small "shadow stocks' will not enjoy the institutional support of the big boys, and there are inherent risks associated with smaller float and sensitivity to changes in the industries they represent. However, fundamental value is a powerful force, and it may push these two well-run manufacturers out of the shadows.