I am always on the prowl for new ideas for my clients and for the subscribers to my models. While some may come to me from other sources, like reading about a company or doing research for one of my clients, most of my ideas come from screening. I try to mix it up, though, and screen for different types of action. For instance, often I will look for cheap stocks or beaten up stocks, but these usually go onto the watchlist for a while. Other times, I screen for stocks that are working and affordable. Sometimes, though, I screen for that rare combo: Really cheap but also working.
There is a lot to be said for buying stocks that are performing well. A stock price is a measure of supply and demand, and a stock that is working has good demand most likely. In this wishy-washy market, which has been suffering from minimal retail demand, there is a real danger in just jumping into "in-demand" stocks. The moment they aren't in demand, you are stuck with a big hit like what happened to O'Reilly (ORLY) last month. So, while I like to find stocks that are "working", I am even more cautious than usual about jumping into "momentum" names.
So, with the idea of culling from the best of both worlds, I designed a screen in Baseline that kicked out a lot of ideas from which I was able to hone in on a few that might merit further attention. Here is how I got started, keeping it quite simple:
- Universe = Russell 3000
- Trailing PE < 13
- Price/52-Wk High > 95%
- 5-year Price Return > 0 (i.e. above the 2007 highs)
The resulting list had about 40 names, the majority of which were Financials. A few of these were mortgage REITs, which have substantial leverage. Most were small banks and probably a great topic for a different article. I narrowed the list further by trying to focus on names that weren't more than a double off of their 52-week low, that weren't too widely followed and that had shown good 5-year earnings growth. Here are the six that I selected:
click to enlarge image
I sorted the list from high to low by trailing PE, so I'll go in that order. A little caveat - none of these are on my watchlist, though I did some work recently on Jarden (JAH) and used to know HCC Insurance (HCC) fairly well.
I included a few additional columns of information. First, note that all of these companies are Mid-Caps, with the exception of First of Long Island (FLIC), which is a Small-Cap. Also, all of the stocks have some debt. I highlighted in green the two with relatively low net debt to capital and in red the two that are relatively high. The stocks are anywhere from 29% to as high as 83% above the 52-week lows - no bottom-fishing here! With the exception of Jarden , most of the stocks are up just slightly more than the market this year.
I included earnings growth for the past five years - all have grown except HCC, which is down slightly. I also have 2013 consensus earnings growth, which indicates analysts expect growth from each of the companies. Two stocks pay no dividend, and two, marked in green, yield more than the S&P 500. Finally, for an alternative valuation measure, I included Price/Tangible Book Value. A couple have negative tangible equity (in red), while the two Financials (in green) trade relatively close to 1X.
Mentor Graphics (MENT) makes software for the semiconductor industry. On a forward basis, it trades at 11.5 PE, and estimates have been increasing. 11 analysts cover the stock. The valuation is lower on a PE basis but similar at 8X EV/EBITDA to its two closest peers. The company has been the subject of several activist shareholders, an, according to the proxy filed in April, Icahn owns almost 15% of the company. CEO Walden Rhines (65), who has held that role since 1993, has beneficial ownership of 2mm shares, while the CFO has beneficial ownership of 1.47mm shares. From a technical perspective, the stock has been banging up against 16 for a while and is just below its 52-week high set in late February.
FLIC is a bank based in Glen Head, NY operating primarily in Nassau and Suffolk Counties on Long Island but with three branches in Manhattan. This looks to be an extremely conservative bank, which isn't surprising given the large insider ownership (12.5%). Earnings have almost doubled over the past decade, while book value per share has more than doubled. Most recently, the company has been flooded with deposits. They cut their dividend in 2008, but they have increased it each year since, leaving it higher than its prior peak. The stock just cleared it's prior all-time high from early 2011. I own a stock like this in my Conservative Growth/Balanced Model Portfolio, National Bankshares (NKSH), and it is behaving similarly. It also made this screen, but I went with FLIC due to its slightly lower valuation (and my interest in checking it out!). Just three analysts cover the stock, and their estimates have been fairly steady.
Snap-On Tools (SNA), the second largest on the list by market cap, is covered by only five analysts, which surprises me somewhat. The stock, which trades at 12 PE on a forward basis, has averaged 15X for the past decade. The company, based in Wisconsin, is global and uses franchisees, direct access, distributors and the internet to market its tools and diagnostics. It originated the mobile van tool distribution channel for the automotive repair market. Insiders own about 2.2% of the company, with CEO Pinchuk controlling about 1%. The stock cleared its prior all-time high from 2008 early last year and has been banging up against solid resistance just above here in the 62.50-64 area. Estimates have been rising steadily.
JAH is an interesting company that has performed exceptionally. It's an acquisition machine (though it's been a while since they did a big one - early 2010), led by finance guys who own a lot of stock and have gotten it right so far. The company, a collector of iconic brands, is a big player in sporting goods (Coleman, K2 and many others), consumer products (Oster, Crock-Pot, Mr. Coffee and many others), and home-related brands (like Hoyle and Bicylce playing cards, NUK for babies and Pine Mountain firelogs and many others). In my view, they have taken good brands and used them as a platform for new product offerings quite successfully. Chairman Franklin and long-time sidekick Ian Ashken own 5.3% of the company (that's > $200mm), with total insider ownership at 6.6%. The stock trades at about 8X EV/EBITDA. The company recently changed its philosophy on capital allocation and has been repurchasing its stock rather aggressively. This one isn't exactly under the radar, with 11 analysts (who have been boosting estimates for 2012 and 2013). The stock is just under its all-time high of 45.09 set in 2007. Management is highly incentivized to boost the stock to close above 48.70 - I think that they will succeed.
HCC also isn't under the radar, with 12 analysts who have been consistently raising 2013 estimates. The company, based in Houston, provides specialty insurance. HCC has boosted its dividend every year since initiating it in 1996 (9% 5-year annualized growth rate) and was a big repurchaser of its stock in 2011 and Q1-12. The stock peaked in 2006 near 35 and trades just below its 2011 high of 33.12. Insiders own just under 2%.
Helen of Troy (HELE) is somewhat similar to JAH - it's an acquisition machine. Based in Bermuda with HQ in El Paso, TX, the company completed a big purchase ($160mm) from P & G in late 2011 of PUR Water Purification Products. They also bought KAZ in 2010 for $272mm. It's products range from personal care to housewares and healthcare/home environment, with Wal-Mart serving as a 20% customer. Unlike JAH, the company has little CapEx requirements. Insiders own 5.6%, but CEO Rubin, who accounts for the vast majority, cut his stake last year, pretty much top-ticking the stock near its post-2004 high of 35 or so. The 5 analysts have been steadily boosting their estimates on average for FY13 and FY14.
So, we have briefly looked at six of the stocks with the powerful combination of low valuation, strong technicals and solid fundamentals. Of course, this was only a first look, but a few of these look quite interesting to me.
Disclosure: NKSH is in one or more models managed by the author at InvestByModel.com