Why These 2 Under The Radar High Flyers Are Long-Term Buys

by: Spencer Knight

Over the past six months, the majority of investors have found it difficult to post gains. To prove this all you have to do is look at any of the major U.S. indexes and you will see the equities market has moved right over the past six months. Therefore, sustained long-term gains have been nonexistent. With that in mind, two under the radar stocks that have substantially outperformed the broader indexes are Domino's Pizza (NYSE:DPZ) and CommVault (NASDAQ:CVLT).

I will begin by discussing how and why these two equities have distanced themselves from the competition over the past six months, followed by a discussion as to why this trend will continue. These two sections are important because during weakness in the equities market these two stocks have the potential to outperform the markets and save an investor's portfolio from steep losses. Likewise, during periods of overall strength each respective stock will surge.

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One important note to make before moving on is that I am using the time frame of the past six months because this covers the tail end of a bull market as well as a bear market that became prominent in early August. This is important because it will give investors a glance at the possibilities each stock has during bull markets and bear markets; which tend to oscillate during the year.

Nevertheless, over the past six months Domino's has outperformed the Dow Jones by about 40%. There are two main reasons investors have seen Domino's share price continue to move higher during the past six months: the first reason is the fact that Domino's has beat earnings estimates four quarters in a row. And the company's aggressive growth in developing countries, such as India, has given investors a reason to buy the stock and watch the share price rise. On the other hand, value investors will point to the company's miserable cash to debt ratio and fret the future is shrouded in failure.

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Currently Domino's has about $32 million in cash with no long term investments. Combine this with long term debt of $1.45 billion and you get a strong argument against Domino's over the long term. With that in mind, as long as the company continues to grow and bring in revenue from different regions the company will be able to pay the debt at some point. Furthermore, there is no real reason for the company to pay the debt in the short term because it is long-term debt. Therefore, this does not directly affect the company in the present. In fact it is likely this long-term debt is due to the opening of new stores throughout the world.

Despite the debt Domino's will continue expanding in order to bring in the income needed to be debt free over the next decade. Also, Domino's CEO Patrick Doyle has embarked on a mission to pay off this debt via refinancing packages. Even though these plans are extremely slow to come to fruition, the fact that Doyle recognizes this debt is important is a positive long term indicator because many CEOs tend to ignore long withstanding debt until it crushes the company.

Nevertheless, due to Domino's plans to refinance and pay back debts investors have rewarded Domino's stock with upward momentum. However, it is important to note Domino's large debt to cash ratio is concerning, but if Domino's is able pay down a large portion of debt (i.e. a public offering of shares) the company will be better suited for the coming decade; despite the dilution of new shares.

In fact, the possibility of a public offering is a minute reason the share price has continued to climb. Since investors are speculating a public offering will occur, they may be pushing the share price higher in order to force Domino's to offer the new shares at an elevated price. If this is true, this is a bearish indicator because it indicates the share price is artificially inflated.

With that in mind, the stock currently trades roughly 22 times earnings; which is another fact Domino's bears point out. This P/E ratio is relatively high for a company that is not necessarily known for being in a growth phase. However Domino's is in fact a growth company due to aggressive expansion; which includes a planned opening of 29 franchised stores in India. Because of the proposed expansion efforts in developing countries, I believe the stock deserves a P/E ratio around 20-25.

Currently the forward twelve months (ftm) P/E ratio is 18.1 and the forward P/E ratio for fiscal year 2012 is 17.42. It is important to view fiscal year 2012 earnings because Domino's fourth quarter is the strongest since the company's fourth quarter is 16 weeks. Therefore by viewing fiscal year 2012 we can get a clear picture of how strong analysts are expecting the company to grow.

However, since Domino's share price is comfortable in the 20-25 times earnings range we can determine where the share price will be at the end of 2012 and early 2013; which is important for long term investors. Based upon the current fiscal year 2012 earnings, Domino's share price will be within the 42.75-44.55 range at the end of 2012; which is 28%-33% from Friday's close. This increase in the share price is dwarfed by the growth over the previous 12 months. However it is better to be conservative rather than give investors a false sense of security.

As you can see Domino's is an under the radar high flyer that will continue to move higher. Similarly, CommVault has avoided large scale attention while outperforming the Nasdaq by nearly 30% and EMC (EMC) by 41%.

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CommVault has come a long way since the company's IPO in 2006. Yearly revenue has jumped 609% since 2003 and the company is on pace for over $400 million in revenue this year. Analysts are expecting CommVault to report revenue at $393 million, but this is underscoring the company's potential; which will reward investors shortly. A major reason for the growth in revenue can be attributed to CommVault's Simpana system that allows businesses to easily store, retrieve and protect data using a single application.

With that in mind, have investors bid the share price up based upon Simpana? This is not an easy answer because on the one hand Simpana is designed to replace Symantec's (NASDAQ:SYMC) NetBackup and IBM's (NYSE:IBM) Tivoli Storage Manager, but on the other hand CommVault is far from well known. Regardless of this, investors are expecting CommVault to take over the data storage and information market.

However, a bearish reason investors have bid the share price higher is the possibility of a buyout from a larger cloud storage or application software company. While several imaginative rumors have been created, it is unlikely that shareholders are expecting a buyout because it will be more economically efficient for the major players in the industry to simply create their own Simpana duplicate rather than fork over $3-$4 billion for CommVault.

As I briefly mentioned above, CommVault's earnings are borderline spectacular. However, there are some minor issues with the financial sheet that require attention; but for the most part investors have seen revenue and gross profit increase quarter over quarter during the past five quarters. Even though revenue has been increasing sequentially CommVault's operating expenses are ruining the company's earnings. Expenses are draining roughly 85% from the company's revenue and CommVault is generating less than 10% net income from revenue.

Nevertheless, CommVault has continued to generate positive revenue and beat earnings estimates over the past 10 quarters. These are the two reasons CommVault's share price has soared over the past six months, and these same reasons will thrust CommVault's share price higher in the coming years. However any sign of weakness will lead to a sell off.

Unsurprisingly CommVault's P/E ratio is currently 48.9. This should not be surprising because CommVault's growth is causing investors to put speculative money into the stock. Nevertheless, the ftm P/E ratio is 44.2 and the fiscal year ending in 2013 P/E ratio is 41. Therefore the share price will need to move higher to keep the P/E ratio around 50.

CommVault's stock is comfortable with a P/E ratio around the 45-50 range because the company is growing at a fast pace and there should not be severe long term speed bumps. Especially because the company offers simpler data management than some of the major cloud and data storage companies. Therefore if the stock's P/E ratio stays at 47.50 over the next year we will see the share price reach 52.25-53.20; which is 16%-18% higher than Friday's closing price.

This may not be an impressive increase in the share price but this illustrates why CommVault needs to lower operating expenses. The company's expenses are draining the earnings for shareholders and this will keep the share price from moving higher. However if investors do not mind the lack of earnings per share we will continue to see the share price and P/E ratio move higher together; which will raise a yellow flag regarding the long term reasoning behind CommVault.

Both companies have many positives going their direction; including momentum. Momentum particularly applies to Domino's. But keep in mind these are not perfect long term stocks by any stretch of the imagination. The chances of these stocks performing extraordinarily well over the next decade are high, but any type of weakness will send each respective share price to the ground. And when dealing with companies with highP/E ratios you have to be careful not to get roped into a fight with a bear.

Disclosure: I am long EMC.