How to Make Money with Fat Stocks

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sure you want to be thin and rich in real life, but you don't want your stocks to be rated Underweight!  Finding Overweight stocks with low PEGs isn't easy in the torrid run-up of the last year. Screening for mid-caps with Wall Street Outperforms, gross margins over 25%, trailing P/Es under 15, and EPS growth rates of 30% over the last three years elicited only seven names out of a possible 1,674. Using the free stock screen at Motley Fool.com under the CAPS tab I further screened for CAPS with four star rankings or better, bringing it down to five.

Those five names were Cirrus Logic, NetEase, Silver Wheaton (NYSE: SLW), Rosetta Resources (NASDAQ: ROSE), and Oil States International (NYSE: OIS). Tossing out NetEase because it's a volatile Chinese internet stock with the highest PEG, that left two oils and a precious metals company. Semiconductor Cirrus Logic also came up, but its fortunes are too dependent on Apple and it seems to fall harder and faster from the tree when Apple declines.

The not too rich or too thin winners

Silver Wheaton may be the most intriguing company on the list, as it is the only one with yield at 2.10% and a beta of exactly one despite being a silver and precious metal streaming company. It doesn't actually mine itself; it has 20 long term silver and gold purchase contracts.  It is close to its 52 week low as silver and gold has declined dramatically in price recently.

However, it has very low overhead (only 27 employees and based in Vancouver), a gross margin of 85.08%, and a PEG of .78. Over the past three years revenue and EPS growth has been 39.40% and 46.39%, respectively.

Analysts have a median price target of $38.30 for serious upside from its June 16 close of $23.31. They are bullish, with 10 Wall Street Outperforms, more so since Silver Wheaton has diversified into gold contracts lately, inking a deal with Vale, the Brazilian miner.

Silver Wheaton comes in under a 15 P/E by the skin of its teeth at 14.3 with a forward P/E of 13.55, but it also merits a four star CAPS ranking. Caveats with Silver Wheaton are the same risks associated with any company exposed to silver and gold, as well as a significant decline in net operating cash flow from $249 million in Q4 2012 to $167 million for Q1 of 2013. Fool Dan Caplinger has a video detailing other risks, like possible competition and counterparty risk.

While the dividend payout ratio stands at 30%, buying Silver Wheaton for yield alone isn't advised. Fellow Fool Rupert Hargreaves has doubts that its dividend can be covered if silver prices remain depressed.

Two oils that are pretty slick

Oil States International, a global specialty service and products supplier (also called accommodations) to oil and gas drillers and producers, earns a five star CAPS rating and has a trailing P/E of 12.13 and a PEG of .77.

Oil States has performed well this last year with gains of 33.55%, and is only 1% off its 52 week high of $94.32. The company has enjoyed stunning three year EPS growth of 86.43%, although three year revenue growth has been more modest at 28.60%. Gross margin was the lowest of these screened names at 25.14%.

It has garnered 12 Wall Street Outperforms and its median price target is $99.50, but caution is advised after the company received four downgrades in the last two months, losing two Outperforms and two Buys. Although the short interest is 4%, it is decreasing.

Mostly that was on valuation due to a 40% run up in the stock after hedge fund activist David Einhorn bought 2.7 million shares to make it his largest new holding in Q1. Einhorn gave a $120 price target based on his sum of the parts analysis at 8.6 x 2013 EBITDA, and then conjectured an $155 pps if the company would turn its Accommodations unit into a REIT. Einhorn thinks that the Accommodations division is undervalued with its high growth and return on capital. JANA Partners Barry Rosenstein owns even more than Einhorn, with a 9.1% stake in Oil States.

Rosetta Resources, an independent oil and gas explorer and producer, is more gas oriented than oily. Hey, gassy and fat--what could be better? Rosetta Resources has 18 Wall Street Outperforms with a PEG of .30.

With some of the lowest costs to drill in the industry and prime property in the Texas Eagle Ford shale region, Rosetta Resources will be in the catbird seat when natural gas prices rise with increased demand.

Its gross margin stands at 81.2% with an impressive 96% EPS growth rate over the last three years. It reported on May 6 another EPS beat, but its revenues missed. For the past three years revenue growth has lagged EPS growth at only 27%. Its trailing P/E is 13.12 with a forward P/E of 9.48.

An important advantage going forward for the company is this focus on the Eagle Ford, which allows them just about the lowest reserve replacement costs in the industry at $6.99 per barrel of oil equivalent. Fool Tyler Crowe explains reserve replacement costs with industry comparisons here.

It also has the lowest corporate governance risk rating of 1 (the best!).  CEO James Craddock's compensation of $690,000 is certainly among the lowest in the natural gas patch compared to similar market cap SandRidge Energy and much larger Chesapeake Energy.

The Foolish Takeaway

These three mid-caps are still dependent on a rise in silver and energy prices. Most promising is Rosetta Resources, with increasing demand for natural gas and a gradual rise in prices. Oil States is worth a look with two activist investors pushing to unlock value. Finally, Silver Wheaton is a good play on a silver resurgence, but likely the most speculative of these "never too thin will make you rich" stocks.

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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!

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