In case you didn't notice, the bull is back. After a Q1 that left the stocks ahead of the pace I was expecting, the market, not surprisingly, consolidated. In my view, the market is no longer overextended or overbought, and hopefully it is on track to resume its rally towards 1600 on the S&P 500 that I described last October.
Recently, I shared one of my strategies that can work well in a bull market - buying good companies that sell off on earnings misses that don't materially reduce the longer-term outlook. Perhaps psychologically, buying stocks that dip is appealing, but as I said in the article, it doesn't always work. An even better strategy in my view is to buy breakouts.
Again, this can be tricky, and one wants to be very careful about timing a breakout, as sometimes they prove to be "false breakouts" and, even when not, chasing an extended stock can prove to be poor timing. Instead, I like to focus on stocks that aren't overly extended. Let's call them quiet breakouts, where the train hasn't fully left the station. These quiet breakouts should have big bases, good earnings growth and reasonable valuations.
In order to identify some potential quiet breakouts, I ran the following screen using Baseline:
Russell 3000 member
Within 5% of 52-week high
One-year Price Return < 20%
YTD Price Return < 12%
Price > 2007/2008 High
One-year EPS Growth > 20%
3-month Earnings Estimate Revisions >0%
Forward PE < 20
What I am looking for are companies that have grown their earnings substantially over the past year, but not the price! All of these are up less than the S&P 500 so far in 2012. I also wanted to find stocks that are banging up against a 52-week high. Some are testing the highs set a year ago when the market peaked, while others are consolidating more recent highs. In all cases, except for two that weren't trading in 2007, the stocks have cleared their former peaks and have "blue sky" above. Finally, just to make sure that the stock has a little fundamental tailwinds, I made sure that none are experiencing cuts to their earnings estimates. Here are the 14 stocks that made the cut, sorted by market cap:
Please keep in mind that these aren't recommendations. In fact, I was very unfamiliar with a couple of these companies before running the screen, somewhat familiar with several, moderately familiar with two and very familiar with only three, including Chevron (NYSE:CVX), which is in my Conservative Growth/Balanced Model Portfolio, and Middleby (NASDAQ:MIDD) and Northwestern (NYSE:NWE).
I obviously like CVX. Like many of the large integrated oil companies, it is quite cheap. It is outpacing many of its peers as well. The stock has been going sideways for the last sixteen months in a 10-point range around $100 roughly. I think that the stock could trade to $148 over the next year, based on attaining a PE of just 11X.
MIDD is a great example of the kind of quiet breakout that interests me, and one of my clients added the stock earlier this year upon my recommendation. I am targeting $140 over the next year, based on attaining a 20PE on a forward basis. Recent international expansion reports by client YUM (NYSE:YUM) bode well for MIDD, which sells equipment to restaurants as well as food processors (increasingly in emerging markets). I also thought that the Illinois Tool Works (NYSE:ITW) report that highlighted solid organic growth in the industry was a harbinger of solid near-term potential.
I visited NWE in the summer of 2010 - it's a very well-run utility (gas, electricity) in my view. The company's service territory includes Montana, Nebraska and South Dakota. Earlier this year, it received approval for a wind project. As much as I like the company's prospects, I don't see this as a compelling investment, but it's not bad for a utility (14 PE, 4.2% yield).
Now I will just share very preliminary thoughts on the other eleven names, beginning with Union Pacific (NYSE:UNP). One of the few remaining publicly-traded railroads, UNP was hardly fazed by the Great Recession. Earnings per share for 2012, projected at $8.12, are almost double the $4.50 earned in 2008. At 8X EV/EBITDA, valuation is at the median for the past decade.
American Capital Agency (NASDAQ:AGNC) is a Mortgage REIT yielding 16%, though it just reduced its dividend earlier this year from $5.60 to $5. While the stock has performed well, it's less about capital gains than income, so I would put this low on the list in terms of prioritization for further research. At 1.1X NAV, it's likely to track NAV going forward.
American Water Works (NYSE:AWK), a water utility company, has a relatively new CEO who has been swapping local utilities with rival Aqua America (NYSE:WTR) in a move that seems to be benefiting both companies. Like NWE, this seems like a good company at a relatively full price. It seems reasonable to expect that the company will be increasing its dividend soon, as its Q3 dividend has increased in each of the past three years.
Towers Watson (NYSE:TW), the employee benefits and HR consulting company formed by the merger of Watson Wyatt and Towers Perrin in early 2010, is another company that has performed quite well despite the weak global economy. Even with record earnings that are on track to grow 27% in fiscal 2012 (June), the current 12.3 PE is at quite a discount to the median over the past decade of 15X.
Corn Products Intl (CPO) will be changing its name to Ingredion on May 15th, assuming shareholders approve. The company makes starches and sweeteners, animal feed products and corn oils, with sales to North America representing 54% of the total, South America at 25%, Asia Pacific at 12% and EMEA at 9%. The company used its under-leveraged balance sheet to do a relatively large acquisition of National Starch in 2010.
Kirby (NYSE:KEX) is based here in Houston, and I had the opportunity to meet with management at their HQ in 2011. One would have to think that Kirby's barge business will be a beneficiary of the low natural gas prices that are leading to a renaissance for North American chemical production. The company did a huge acquisition in 2011 (K-Sea) as well as several smaller ones. It also dramatically expanded its diesel engine services business with the $272mm purchase of United, which also expanded its oilfield services exposure. This seems like a very high quality company, with the earnings as persistent as the flow of the rivers where its barges operate.
I have followed Copart (NASDAQ:CPRT), the car auctioneer, for many years. The company did a massive share repurchase through a tender at the beginning of 2011, and the stock never looked back. The company recently relocated from California to Dallas. Again, another high quality company.
Signature Bank New York (NASDAQ:SBNY) has posted extraordinary growth considering the challenges of the banking industry. I don't know this one very well, but it's not a typical bank, as it has a small number of branches and is focused on private client services. Over the past three years, deposits, loans and equity have all doubled, though the share-count has increased by almost 1/3.
LTC Properties (NYSE:LTC) is a REIT focused on senior housing and long-term healthcare properties (with a charter school too). Again, while it is breaking out, this one is not so likely to be a rocket as much as a nice steady-Eddie. Note, though, that with just $159mm in debt, it carries low leverage and a 5.2% dividend to boot.
Fred's (NASDAQ:FRED) is really cheap, trading at just 5.6X EV/EBITDA, the lowest level in more than a decade. The stock has been going sideways since 2006, though it is well below the all-time high of $38.73 set in 2003. The company operates 679 discount general merchandise stores in the southeast and has 21 franchised stores and is focused on very small towns (82% of stores in markets with < 15K). According to its SEC filings, the company intends to open 22-28 stores and close 10 in 2012. Insiders own approximately 8% of the company.
Last but not least is Computer Task Group (CTGX), which is one of the ones I had never heard of. Like FRED, it's not an all-time high either, but it has been on a tear since clearing its 2008 highs in 2009. The company, which employs 3700 people in North America and Europe, provides IT services (63% of sales in 2011) and IT staffing solutions, which is where it is emphasizing growth efforts. Insiders own an impressive 21% of the company, and it's widely distributed among senior executives and directors, with the CEO owning 6% and seven others with stakes in excess of 1%. The company has no debt and $1 per share in cash.
So, 14 ideas to investigate further, surely not all of which will work. I have confidence in MIDD and CVX, and some of the others look interesting too. Which of these quiet breakout stocks looks promising to you?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: CVX is in one or more models at InvestByModel.com