logo
  Join        Login             Stock Quote

The Best Companies You've Never Heard Of... And How You Can Profit

 March 06, 2013 12:25 PM
 


As most investors are probably aware, headlines and mispricings often uncover short-term profit opportunities with stocks.

I've actually talked about this last month, when I compared the fundamentals and insider position in Barnes & Noble (NYSE: BKS) with Dell (Nasdaq: DELL), then paired the analysis it with two other stocks poised to pop. News broke the next day of Barnes & Noble Chairman Leonard Riggio's possible buyout plans of his company. The stock jumped 14%.

[Related -United Technologies Corporation (NYSE:UTX): How Pension Shift Will Drive EPS?]

Also, CME Group's (Nasdaq: CME) two-month profit of 18.6% followed another article recommending the stock.

But generational wealth is not made by continuously picking the right stock at exactly the right time. Truly successful investors find companies with great management that will make huge long-term returns.

So among the multitude of measures and screens (filtering stocks through specific variables), how does an investor pick stocks for their long-term holdings?

[Related -Facebook Inc (FB) : Mobile Strategy Is Getting Traction]

I struggled for what seemed like an eternity to get to the right answer.

But I've finally found four simple metrics that have rarely let me down in my search for quality companies. These metrics work well for any size company, but I like to focus on small and mid-sized companies for my long-term investments. The goal is to find an off-the-radar stock that could become the next Google (Nasdaq: GOOG) or Microsoft (Nasdaq: MSFT) before it explodes and other investors jump in.

And there's a way to do that...

Start with these metrics

1. Return on assets (ROA) is one of the best measures of how efficiently a firm uses its assets, and how well management turns capital into profits. It is the company's net income divided by total assets; it breaks down the firm's profit margin and asset turnover.

Many investors like to use return on equity as their preferred profit metric. (That's ROA times the company's debt leverage.) I prefer ROA because management can boost its return on equity above peers by taking on dangerously high levels of debt.

2. A firm's five-year average sales growth can say a lot about management's ability to consistently outperform peers consistently. Net income and many other financial accounts can be manipulated, but it is difficult to play tricks with sales. A company that can consistently beat peers in sales growth has a competitive advantage.

In all of these cases, compare apples to apples. For example, with sales growth across companies, compare firms of comparable size and sector. Double-digit sales growth in a mega-cap firm in a mature industry is a lot more impressive than the same growth at a small tech startup.

3. Operating margin measures management's operational efficiency. This may be my favorite metric. It is the company's earnings before interest, taxes, depreciation and amortization divided by revenue. Operating margin reduces the effect of accounting, financing and tax policies on profits.

You will probably see net margin more often quoted in the financial press. (That's the company's net income divided by revenue.) The net margin includes effects of discontinued operations, accounting changes and other extraordinary items management wants to throw in to manipulate earnings. I feel the operating margin is a more pure metric on how the company manages its expenses.

4. Finally, the insider and institutional ownership rate is my borderline decider. If the other metrics are good, but I cannot decide whether to invest, then I look at ownership. Insiders and institutional owners usually have access to information individual investors simply can't get. If they are optimistic about a company, then it could be because they have seen something I've probably missed. Be especially watchful for investments by activist shareholders. These are the institutional funds run by investors such as Carl Icahn and Mario Gabelli that buy positions in deep-value companies, then turn them around.

Notice I don't look at dividends for a long-term holding. Great managers are also great stewards of investor wealth. If they can reinvest income into the company and earn a higher rate of return than their cost of capital, then they should do so at the expense of dividends. I can create my own dividend by selling a portion of my position after it has increased, paying a lower tax rate on capital gains than income.

Looking under the radar

With these three metrics in mind, I found three companies that have caught my attention recently for their potential to deliver long-term returns through their consistent performance in these core metrics.

1. Triumph Group
Triumph Group (NYSE: TGI) designs, engineers and manufactures a portfolio of aerostructures, aircraft components and accessories for commercial and military aircraft.

The company earns a return of 7.4% on its assets, well above the 3.5% average for peers in aerospace and defense. Its operating margin of 16.4% is more than double the 7.3% from most peers in the industry. The company has seen its sales grow by an annual average of 36% during the past five years, and insider/institutional ownership is extremely high at 96% of the shares outstanding.

While other defense contractors and suppliers may face hard times with lower government expenditures, the Triumph Group should continue to do well with its higher profitability and efficiency.

2. Atwood Oceanics
Atwood Oceanics (NYSE: ATW) is an international offshore drilling contractor with rigs in the Gulf of Mexico, South America, West Africa, Southeast Asia and Australia.

The company earns a return of 9.9% on its assets, more than double the 4.3% average in the oil-well services sector. Its operating margin of 39% is way higher than almost all others in the industry, which average about 11%. The company has seen its sales grow by an annual average of 9.5% during the past five years, and insider/institutional ownership is 88% of the shares outstanding.

Outside of the United States, the next big thing in exploration is deep-water drilling. Atwood Oceanics, with its mobile offshore drilling units, has three ultra deep-water drill ships and the proprietary knowledge to make big progress in the sector.

3. Gildan Activewear
Gildan Activewear (NYSE: GIL) is a vertically-integrated global manufacturer of basic apparel, the items we need every day, such as socks and underwear.

The company earns a return of 12.3% on its assets, almost double the peer average of 6.2%, and is extremely high for a company in a mature industry such as apparel. Its operating margin of 11.5% is higher than most of the industry's companies, too, whose operating marging average is about 7.6%. The company has seen its sales grow by an annual average of 15% during the past five years, and insider/institutional ownership is 74% of the shares outstanding. Gildan Activewear beat expectations for sales and net income in the most recent quarter.

It also recently ramped up its purchase of raw materials, leading some analysts to believe that management predicts increased demand.

Risks to Consider: Not every company that beats peers in these four metrics will be a great stock for your long-term portfolio. Before investing, match measures with your opinion about the health of the overall market and the respective industry.

Action to Take --> Not every investment can be a two- or three-bagger inside of a few months. You also need stocks in your portfolio that are well-managed companies and consistently outperform their peers in the industry. This will help build a well-diversified portfolio with stocks that should deliver market-beating returns throughout your lifetime.

-- Joseph Hogue

P.S. -- Have you heard about the $1.7 trillion "Dividend Vault"? Simply put, it's the easiest way we know to collect thousands of dollars in dividends each month for the rest of your life. To learn more, click here.

Joseph Hogue does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.
iOnTheMarket Premium
Advertisement

Advertisement


Post Comment -- Login is required to post message
Name:  
Alert for new comments:
Your email:
Your Website:
Title:
Comments:
 

rss feed

Latest Stories

article imageChipotle Mexican Grill, Inc. (CMG) Q2 Earnings Preview: Will Higher Traffic Offset Higher Costs the Key

Chipotle Mexican Grill, Inc. (NYSE:CMG) will host a conference call to discuss second quarter 2014 read on...

article imageNetflix, Inc. (NFLX) Q2 Earnings Preview: The Ruby Month for a Reason

Netflix, Inc. (NASDAQ:NFLX) will post its second-quarter 2014 financial results and business outlook on its read on...

article imageLadenburg Thalmann Financial Services (NYSEMKT:LTS): Heavy, Durable Insider Buying

Ahh, but any worries over price levels didn’t stop multiple insiders at Ladenburg Thalmann Financial read on...

article imageInternational Business Machines Corp. (IBM) Q2 Earnings Preview: Small Beat and Pop

International Business Machines Corp. (NYSE:IBM) will host a conference call Wednesday, Jul. 16, 2014 at read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.