Great Companies That Top Investors Are Buying

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

I think investors should consider companies with improving fundamentals and attractive valuations. In the article I will detail several stocks with improving fundamentals that top institutions were adding to their portfolios. As I explained in a related blog post in Warren Trades, it is important to track hedge fund holdings because institutions have more resources than an individual investor to analyze fundamentals of any company. 

Gardner Denver

The first company is Gardner Denver (NYSE: GDI). I think there are several reasons to think why Gardner Denver fundamentals could improve. First of all, the current CEO appointment is positive because it follows a shareholder oriented strategy to maximize the company value. The first decision after hiring the interim CEO was to start working with Goldman Sachs to explore strategic alternatives to enhance value for Gardner Denver shareholders. Second, the current share buyback authorization is used up, and the Board will approve another round of buy backs. Finally, the company is a strong potential acquisition target by strategic or financial buyers. Recently, the company announced that it is exploring the possibility of being acquired, solicited by activist investor ValueAct Capital LLC, a 5.1% shareholder of GDI that has pressured the Board of Directors. The first round of bids should be in by November 5, after which the Gardner Denver board will decide if it wants to pursue the deal. I think the bar is very low for GDI considering that buy-side expectations for 2013 are for declining earnings and sell-side expectations are for flat earnings, following huge negative EPS revisions in the last reported quarters. The company earnings upgrades could drive the stock higher; in fact, management recently announced that despite the sluggish global environment and headwinds from currency conversion, the company's diverse portfolio of attractive businesses and continued focus on operational excellence allowed Gardner Denver to exceed third quarter targets. I think that if the current management team fails to execute, the company is likely to be acquired, so there is a floor on the downside. According to Credit Suisse, the company is buying back a lot of stock, which will help drive EPS growth next year, and support the stock near term. In addition, GDI will outperform if natural gas price starts to appreciate, given its pressure pumping business. Valuation multiples have contracted by 50% over the past 12-18 months, and appears to have now found a floor. Joel Greenblatt added to his existing position in the stock last quarter.

Gulf Mark Offshore

Another stock I like is Gulf Mark Offshore (NASDAQOTH: GLFE). The stock is creating a technical bottom in the $32-30 range and could rise considering that increased demand for boats continues to be driven by increased capex spending in the offshore E&P sector. Of Wall Street recommendations tracked by S&P Capital IQ, the average opinion on Gulfmark Offshore is outperform, with an average price target of $55.00. In fact, Credit Suisse expects utilization and rates to strengthen into the back half of the year which should push earnings higher. I think that the stock is cheap at just 6x consensus 2012 EBITDA estimate. The stock has all the bad news priced in and I think the risk is skewed to the upside. As explained in other blog post, it is essential that a stock shows both an improving fundamental picture and a constructive price action. Top value investor Michael Price added to his GLF position last quarter.  

Global Payments

Global Payments (NYSE: GPN) is a solid under-levered that exhibits solid cash flow metrics (strong free cash flow/sales of 32% reported in 2011). In addition Global Payments has one of best international footprints. The company has made several acquisitions that opened the doors to emerging markets like Russia, China and India, a strategy that could drive future growth.  It is also getting arms around Canada, putting breach behind it, taking more control over own destiny in US, and has much lower multiple than its comparables. The stock currently trades at just ~11X consensus analyst CY13 GAAP EPS estimates compared to the group average of ~15x. On an EV/EBITDA basis it trades at 5.5x vs. group average of 8x. Joel Greenblatt bought the stock in March and added to his position last quarter.

Jive

Jive (NASDAQ: JIVE) is a very interesting technology stock to consider. Fidelity initiated a position in the stock last quarter. The rising trend of the usage of social software in the enterprise (ESS) will increase dramatically over the next 3-5 years. The company has several advantages. First it has one of the most feature rich platforms in the market. Second, it is the industry leader. Lastly, it is the only independent social software vendor in the market. Credit Suisse estimates that the Enterprise Social Market will grow to $6 billion in 2016 from just $750M in 2011 and Jive's prospects remain strong based on this secular trend. Recently, UBS upgraded Jive to Buy from Neutral and lowered their target to $20 from $22 explaining that they had been on the sidelines on the stock due to valuation but the recent pullback has changed that. UBS recommends you buy Jive based on: attractive valuation, underperformance in the stock YTD, added sales firepower, competitive threats overblown, and undeserved collateral damage from consumer social space among other reasons.

KBR

The last stock is KBR (NYSE: KBR).This stock is very interesting as KBR is one of the companies that would most benefit from increased North American energy spending particularly LNG, GTL, Petrochem and Ammonia plants. This was explained in the recent earnings conference call with analysts. I think the catalyst for share outperformance could be any project announcements, as there is increased interest due to benefits from North America energy spending. In addition, I think that continued EPS execution and reduced concern over 2013 projections may help the shares.

 

 

 
 


martinzaldua has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.

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