Lining up the Usual Suspects for Profits
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Dark alleys, femme fatales, dramatically lit malcontents are the hallmarks of film noir and suspense, but what does this all have to do with the (supposedly) transparent world of stocks? Think of the market as a detective would. Which stocks have the most motive for a merger or have an opportunity to take share? Means should be self-evident... which stocks have the free cash flow to invest in R&D or raise their dividend.
Just as Sherlock Holmes in his many iterations can pick out one detail that unravels an alibi it's easier to find bad companies you don't want than good ones.
A winner in plain sight
Basic clues to finding good stocks should be reasonable P/Es, insider holds, institutional support, and accelerating revenue growth. Stocks that fit the criteria are usually small to mid caps that are up and coming like Leucadia National Corporation (NYSE: LUK).
Imagine my surprise when I ran a Motley Fool screener (like a lineup for stocks and can be found under the CAPS community tab) for midcaps with revenue growth greater than 60%, institutional ownership over 75%, and a yield to find usual suspect and old friend Leucadia National Corporation, a stock I'd covered before that is still outperforming the S&P, has a yield of 0.9%, and a P/E of 7.72 and the only one the screen returned with a five star CAPS call. It was like finding the purloined letter in plain sight.
Since I first wrote about this diversified holding company, a mini-Berkshire Hathaway, which in fact collaborates with Berkshire on a mortgage company called Berkadia, it has completed its merger with Jefferies, the investment banking firm, which is now a wholly owned subsidiary. Its 15.92% stake in Inmet Mining is looking good for the approval of a takeover by First Mineral. It has also spun off its least profitable unit, a California winery, Crimson Wine Group.
Leucadia has a big insider hold by both Chairman Ian Cumming and CEO Richard Handler at 18,726,054 shares and 11,184,168 shares respectively. Succession plans had been a worry before the Jefferies merger but Handler is a younger man at 51.The stock is trading slightly under book value of 27.67 and revenue growth has been over 100% over the last three years. Leucadia bought timber and copper assets in the depths of the financial crisis as well as partnering up with Berkshire. Now the profits are coming home to roost.
The game is afoot
Running a big cap screen on most of the same metrics only HollyFrontier Corporation (NYSE: HFC) came up better than Apple. Both have a 2.3% yield, stunning revenue and EPS growth but Holly Frontier had slightly higher insider ownership and a lower P/E of 6.3 and it earned a five star CAPS call.
HollyFrontier is a US independent petroleum refiner and marketer and it barely meets the height requirement for a big cap at $10.39 billion but over the last few years EPS growth rate is 72.55%. There are some caveats with this name as it can be volatile price-wise. There are also concerns that ethanol compliance credits which have soared from a dime to $1.10 may hurt refiners like competitor Valero and HollyFrontier. HollyFrontier's CEO Mike Jennings was railing at an energy conference just on March 19 about these credits, also called RINs (renewable identification numbers), and that speculators are getting into the RIN market.
Analysts are fairly bullish on HollyFrontier with 12 buys or strong buys, seven holds and zero sells. The median price target is $59.69 for almost 15% upside with a high target of $85.00. The stock has already moved 43% over the last year so no need to chase this one. News on oil or ethanol prices will likely get a better price.
While it isn't as cash rich as Apple, it only has $1.34 billion in debt to total cash of $2.39 billion. HollyFrontier would be almost a perfect stock if it weren't for the negative earnings growth rate of -7.30% predicted by analysts undoubtedly due to these ethanol credits.
Sniffing out the clues on a small-cap
Finally, a small cap that has managed to outperform incognito is Inter Parfums (NASDAQ: IPAR), a fragrance manufacturer, marketer, and distributor with a 5.55 P/E, yield of 2.00%, an 18.47% three year revenue growth rate, and a 72.27% three year EPS growth rate. It also earned a five star CAPS rating.
The company reported better than expected top and bottom line Q4 and record full year results on March 12 even accounting for a one time gain for the end of a licensing agreement. Gross margins improved to 63%. It also announced it would be hiking the dividend by 50% payable to shareholders on record on the ex-dividend date of March 29. It has steadily increased the yield over the last decade.
Finding small caps with a low payout ratio (8%) and little debt like Inter Parfums is like solving the case of The Hound of the Baskervilles. Inter Parfums also has some the most high end and well known fragrance brands like Burberry, Jimmy Choo, Balmain, and Anna Sui. The company also signed two new A-list clients recently, Karl Lagerfeld and Alfred Dunhill. With only 312 employees its revenue per worker is over $2 million. And it has $10.05 in cash per share. Whew! Analysts expect a 12% five year EPS growth rate.
I suspect the telltale sweet smell of success will linger for Inter Parfums as insiders hold for a conviction rate of 56.83% and ever-increasing opportunities to sign up even more luxury fragrance clients.
Not to leave you hanging, Leucadia is like Berkshire Hathaway 20 years ago, undercovered and underappreciated. You know how that turned out! HollyFrontier screened better than Apple on several important metrics but keep an eye on ethanol credits going forward. As for Inter Parfums, I find this one intriguing and practically incognito to the investing media.
These three stocks have enviable fundamentals, but no stock is perfect. Put on your deerstalker and battered raincoat and due your due diligence like the best detectives. These are stellar strting points to investigate a profit motive.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!