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I recently demonstrated that the average stock isn't faring as well as the stock averages, with the largest stocks driving the performance in the S&P 500 (SPY) this year. Only 41% of the stocks in the index have beaten the index. As I shared, Apple (AAPL) alone has accounted for 1/8 of the market's move. This phenomenon, to me, is actually bullish, as it indicates real money coming into the market. Consequently, I suggested buying "healthy laggards", which are stocks that are doing well fundamentally and increasing in price but lagging the S&P 500 slightly.

To illustrate the concept, I set up a screen of the S&P 500, identifying ten names that fit the criteria. Today, I want to extend the thinking that the rally could broaden a bit and focus on applying a similar screen to smaller names (using Baseline). Here's what I did:

  • Universe = Russell 3000 x-S&P 500
  • YTD Price Change = 8-16% (less than S&P 500)
  • 1-year Price Change >25% (>S&P 500)
  • Trailing EPS Growth > 20%
  • Projected 2013 EPS Growth > 14%
  • Trailing Sales Growth > 10%
  • Next Year Projected EPS Revisions Past 3 Months > -2%
  • Forward PE < 20

I would describe the resulting universe of 11 stocks as healthy laggards because, while they are trailing the S&P 500 in 2012, they have beaten the market over the past year and they have very strong trailing fundamentals and an above-average near-term outlook with respect to earnings. As a check, I restricted the list to companies with only very modest, if any, earnings estimate revisions. Finally, mainly to cut down on the number of stocks, I constrained valuation. Here are 11 that made the cut:

(click to enlarge)

Again, these aren't recommendations. In fact, none of these are on my watchlist, so I am going to just share some quick initial impressions. While these stocks may in fact be good ones to buy right now, the real point is to illustrate the concept of the healthy laggard.

Like the previous screen of the S&P 500, industrials earned more than their fair share of spots, and that's no accident in my view. I like the sector and believe that there are a lot of opportunities in it. I have been adding the SPDR Industrials (XLI) to my Sector Selector ETF model portfolio and have also added names to my Top 20 and Conservative Growth/Balanced model portfolios at Invest By Model.

Before discussing the names, which are sorted by one-year return from low to high, let me explain the color-coding. I included net debt to capital, which is one measure of balance sheet leverage. The ones with no net debt are in green, while those above 50% are in red. Four of the stocks with forward PE ratios less than 13X are highlighted in green. Finally, the stocks with PE ratios below 80% of their 5-year average are also shaded green.

Cardtronics (CATM) is a company my client owns, so I am familiar with it. They have a relatively new CEO who has been aggressive about expanding their owned ATM network and their managed network. The combined network includes 55K devices, mainly in the U.S but with some exposure to the UK, Mexico and Canada. They have 16,500 branded ATMs that offer surcharge-free access to the customers of several major banks. Allpoint is their own network and includes the majority of their own ATMs. The stock is consolidating near an all-time high.

Trimble Navigation (TRMB) is all about GPS, with four operating segments that include Engineering & Construction, Field Solutions, Mobile Solutions and Advanced Devices. End markets include construction, agriculture, public utilities and many others. The company has been very acquisitive, reporting 7 acquisitions in the year ending 6/30/12. Subscriptions now represent about 10% of sales. The company invests about 12% in R&D. This stock has pulled back from an all-time high near 56 earlier this year.

Trueblue (TBI) is a blue-collar staffing company, with brands that include Labor Ready, Spartan Staffing, CLP Resources, PlaneTechs and Centerline Drivers. The company has about $3 per share of cash net of debt. Interestingly, five institutions own more than 5%, including some value players like Royce & Co (11%) and Tocqueville Asset (5%).

B/E Aerospace (BEAV) makes cabin interior products for commercial aircraft and business jets and is a distributor of aerospace fasteners and consumables. About half their business is related to commercial aircraft, 38% consumables management and 12% business jets. A couple of things bother me with this one - limited insider ownership and a very aggressive ramp on CapEx to $135mm this year.

Team (TISI) is one I looked at briefly recently, and it sounds interesting. The company provides specialty industrial services for refineries, petrochemical plants and pipelines through 100 locations all over the world. Insiders own 12% of the company, with CEO Phil Hawk owning 4%.

Old Dominion Freight (ODFL) is a Less-than-Truckload trucking company, which tends to be highly correlated to industrial production. Insiders own about 17% here. Despite an unfriendly economy, the company reported in Q2 its best results ever, highlighting share gains. The stock has been consolidating since hitting an all-time high near 33 in March.

MetalsUSA (MUSA) has traded poorly since holders sold stock in August in a public offering. The company operates service centers from which it distributes steel primarily as well as some aluminum building products aimed at residential remodeling. MUSA is exposed to a broad variety of industries, including aerospace, auto, office furniture, heavy equipment, and energy.

iGATE (IGTE) is an offshore IT company that was founded in 1986 and has operations in India, Canada, the U.S., Europe, Mexico, Singapore, Malaysia, Australia, UAE, South Africa, South Korea, China, Switzerland and the UK. Most of their clients are based in North America and tend to be medium-sized to large. GE represents 13% of their business, while Royal Bank of Canada is 10% (down from 24% last year). They bought Patni earlier this year.

Virtus Investment Partners (VRTS) has gotten some attention on Seeking Alpha, both positive and negative (two articles worth reading). I like what they have done, quietly building a very strong asset management business. As Paul Price points out, though, the success of at least some of their funds has waned. Insiders own 4%, while BMO Financial owns 22% and Sonoma Capital owns almost 10%.

WESCO International (WCC), based in Pittsburgh, is a distributor to the industrial, construction, utility, commercial, institutional and government markets. It serves 65K customers from 400 branches and 8 distribution centers. The company was formed from the distribution of Westinghouse Electric in 1994. They call it "international", but 80% of sales are from the U.S. and 16% from Canada.

Finally, United Rentals (URI) rents construction equipment out of 969 locations in the U.S. and Canada. The stock posted an all-time high near 48 earlier this year and has pulled back rather sharply. A big driver of its growth (and future expectations) has been the RSC acquisition, which closed in April. The company quickly recognized $17mm in cost synergies and boosted its 2012 goal to $70-80mm, with eventual revenue synergies of $50mm per year. The CEO sounded quite bullish after Q2, suggesting steady demand for equipment rentals.

So, hopefully my brief comments will stimulate you to look into some of these healthy laggards a bit more closely. As always, I value hearing from those readers who might know more about these companies than I do.

Source: 11 More Healthy Laggards To Consider