It’s Great to Catch a Stock at Its Inflection Point
Posted: February 28, 2017
If you could time your stock purchases perfectly, you would buy stocks at their inflection point.
At that point, a stock is still cheap because of past troubles, but things are getting better.
For this column, I searched for stocks that met five criteria:
- The stock is based in the U.S. and has a market value of $250 million or more.
- The stock’s price is no more than 15 times per-share earnings.
- Earnings in the latest quarter were up at least 15% from a year ago.
- The latest reported earnings were higher than analysts had expected.
- The company’s total debt is less than 50% of the company’s net worth.
From a field of about three dozen candidates, I have chosen five to recommend.
CVS
The largest company that met the criteria was CVS Health Corp. (CVS). I like the rebranding that this drug store chain has been doing. It increased the focus on health-care products in its stores, stopped the sale of cigarettes, acquired more health-care businesses, and added the word “health” to its name.
CVS has been increasing its revenue at a 12% annual clip in recent years, and has steadily increased its quarterly dividend, raising it from about 16 cents a share five years ago, to fifty cents a share now.
American Outdoor
American Outdoor Brands Corp. (AOBC) is better known to investors under the name Smith & Wesson. It changed its name early this year. It makes pistols, revolvers, rifles, handcuffs and related products for consumers and law enforcement agencies.
The stock hit a 52-week low because gun sales have slowed and investors fear that Congress or the states will impose stricter rules. The stock fetches only eight times earnings in a market valued at 22 times earnings. Yet earnings were up sharply in 2016 and are expected to rise again this year.
To diversify, the company has recently purchased Ultimate Survival (camping equipment) and Taylor Brands (knives).
Investors Title
Title insurance is an unglamorous industry, and for homebuyers, an annoying one. Nevertheless, for many home buyers, the choice is either to pay for title insurance or to forget about buying a house.
I expect purchases of both new and existing homes to increase in the next two years and so I think Investors Title Co. (ITIC) has good prospects.
Based in Chapel Hills, North Carolina, the company has shown a profit in 14 of the past 15 years. (Not surprisingly, the exception was 2008, in the heart of the Great Recession.) It is debt free, and its profit margins, while not spectacular, has been improving.
Gannett Co.
The whole world knows that Internet advertising is growing fast, and newspaper advertising is languishing. That’s why newspaper companies such as Gannett Co. (GCI) are out of favor.
Based in Maclean, Virginia, Gannett owns newspapers including USA Today, the Detroit News, the Des Moines Register, the Milwaukee Journal Sentinel and the Cincinnati Inquirer. It also has what it calls a “large and growing digital revenue base,” amounting to about $600 million a year.
Total revenue is fairly flat at about $3 billion a year. But I don’t need to see a lot of growth if I can buy a stock at eight times earnings and 0.3 times revenue, with a dividend yield of 7%.
Alliance Bernstein
For my final pick, I will bring back AllianceBernstein Holding LP, which I selected last year and which returned 28%.
Based in New York City, AllianceBernstein manages about $480 billion for individuals and institutions, and runs about 200 mutual funds.
The investment industry is highly regulated, but the regulatory burden may ease some under the Trump administration. And Trump’s tax policies, by providing some tax breaks to wealthy people, will probably give them more discretionary income to invest.
Last Year
This is the second column I’ve written on trying to catch stocks at an inflection point. The first one was a year ago, on March 1, 2016.
Four of the five stocks I recommended in that column rose and beat the Standard & Poor’s 500 Index. The best gainer was Pier 1 Imports Inc., up 38.9%.
However, my recommendation of Hibbett Sports Inc. (HIBB) led to a 17.7% loss. As a result, my five-stock list ended up tied with the S&P 500 with a total return of 22.2%.
Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.
Disclosure: I currently have no positions in the stocks discussed in today’s column, for myself or for clients.