One Screen, Four Stocks, One Idea
Steve is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Searching for the next great stock investment idea can be a frustrating, time consuming, and even exhilarating process. We often get ideas from reading investment magazines, watching CNBC or Bloomberg on television, listening to tips from friends and relatives, and paying attention to trends in the local shopping mall. During a recent search for stock investment ideas, I found myself scouring the holdings of a mutual fund whose investment style matches mine. This fund was highly rated by a well known fund rating service and I began to think that maybe I should look for companies held by smart investors like this mutual fund. So I ran a screen for companies that are widely held by superior mutual funds, hoping to find some names for deeper research.
The first criteria of this screen was all of the companies that are owned by mutual funds having one of the two highest ratings by the rating service. This yielded 189 companies. Next, I screened for companies that are owned by 3 or more funds so that I was looking at companies with some widespread appeal in the investment community. This whittled down the list to 82 companies. Finally, I wanted to look for companies that are significantly owned by professional investors so I screened for companies with 20% or more ownership by mutual funds. This yielded a manageable list of 10 companies which I further pruned by focusing on those companies that I was familiar with in some meaningful way and that had more than $2 billion in market capitalization. My final group of four stock ideas are Kirby Corp. (NYSE: KEX), Solera Holdings, Inc. (NYSE: SLH), Clorox Company (NYSE: CLX), and Cintas Corporation (NASDAQ: CTAS).
I was familiar with Kirby Corp., the largest tank-barge operator in the country, from a recent news item about a big downward move the company’s shares in June. Over the past 5 years, Kirby has grown earnings per share and operating cash flow compounded annually by 13.2% and 15.8%, respectively, compared to 13.5% annual compound growth in revenue. The consensus estimate for earnings per share growth next year is 14.3% which is an increase from the 12.1% growth anticipated just 90 days ago. The forward P/E multiple at the recent price of $49 is 12.0x so the forward price to earnings to growth (PEG) multiple is a very attractive 0.84x for the leading player in its business.
Solera is the leading software and services company for the automobile insurance claim processing industry. Solera has grown operating cash flow and revenue compounded annually by 36.3% and 48.5%, respectively, over the past 5 years. Earnings per share has grown from ($2.82) to $2.22 during that time. For next year, the consensus EPS growth estimate is 3.3% which yields a forward P/E multiple of 14.2x and PEG multiple of 4.3x at the recent $39 share price. This is a very high PEG multiple and is even worse given the expected slowdown in earnings growth from historic levels and the decrease in growth estimates from 10.3% just 90 days ago.
Clorox is of course associated with its namesake bleach products but only about 14% of total sales are derived from bleach. Clorox has grown earnings per share and operating cash flow by 6.7% and 6.0%, respectively, compared to just 2.4% annual compound growth in revenue since 2006. The consensus estimate for next year’s earnings per share growth is 5.7% which is a reduction from the 7.9% growth anticipated just 90 days ago. The forward P/E multiple at the recent price of around $72 is 16.8x so the forward PEG multiple is 3.0x which is extremely aggressive for a company whose earnings estimates are being cut. Activist investor Carl Icahn is a significant shareholder which may be one reason for the high multiple.
As the largest U.S. based uniform services provider, Cintas has unmatched scale and an efficient distribution network. Despite these advantages, the company has struggled with the weak economy over the past five years with revenue growing just 2.3% compounded annually. Earnings per share and operating cash flow have declined by 13.4% and 26.2%, respectively, over that time but analysts expect growth to resume next year. Consensus estimates call for EPS growth of 10.7% which leads to a P/E of 13.6x at the recent $38 share price for a PEG multiple of 1.3x. This is an attractive PEG multiple that is buoyed by the fact that the consensus estimate has not changed over the past 90 days.
This is just a first glimpse at these investment ideas. As you can see, these companies have a wide range of various investment pros and cons and further research on any of these companies to develop a coherent investment thesis is essential before committing funds to any of them. An understanding of the drivers of cash flow, competitive advantages, and capital structure are good places to start any additional research and among these companies I prefer Kirby because of its dominant industry position, appealing forward PEG multiple, and strong historical and projected growth.
56Steve has no positions in the stocks mentioned above. The Motley Fool owns shares of The Clorox Company. Motley Fool newsletter services recommend Cintas. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.