Prudential and Wabash National Show Value Plus Momentum
Posted: February 07, 2017
Stocks get cheap for a reason. If you are a bargain hunter, as I am, your main risk is that things will get worse for your target company before they get better.
One way to combat this problem is to buy stocks that are cheap but that have started to move up. I call this approach “Value Plus Momentum.”
To be considered for today’s column, a stock had to sell for 15 times earnings or less (value) and must have gained 20% or more in the 13 weeks through February 3(momentum). It also had to have a market value of $250 million or more, and debt less than stockholders’ equity.
Four dozen stocks passed those tests, and I am recommending five of them today: Prudential Financial Inc., Wabash National Corp., United Therapeutics Inc., TopBuild Corp. and Dorian LPG Ltd.
This is the 30th Value Plus Momentum column I’ve written from 2000 to the present. Twelve-month returns can be calculated for 28 of those columns.
The average return has been 15.25%, compared to 8.23% for the Standard & Poor’s 500 Index over the same periods.
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.
Twenty of my 28 columns on this subject have been profitable, and 17 have beaten the S&P 500.
My Value Plus Momentum picks from a year ago were a flop, however. A big loss in First Solar Inc. (FSLR) and small losses in Pilgrim’s Pride Corp (PPC) and Ennis Inc. (EBF) resulted in a 1.63% net loss.
Handsome gains in Sanderson Farms Inc. (SAFM) and Grace Inc. (GGG) went for naught. Meanwhile, the S&P 500 Index rose 22.52%.
Interest rates have been rising for several months, and in my opinion are likely to keep rising in the next two to three years. Not many industries benefit from this trend. But some financial companies do.
Banks are probably the chief beneficiary, but no bank stocks passed my screen for this column. Insurance companies may also benefit, because as rates rise they can invest the float from insurance premiums at successively higher rates.
Consider Prudential Financial (PRU), a giant with a $44 billion market value. The stock is attractively valued at 10 times earnings, 0.7 times revenue and 0.8 times book value (corporate net worth per share).
Pru’s stock has advanced 26% in the past 13 weeks, but I think there is quite a bit of gas left in its tank.
Wabash National (WNC), based in Lafayette, Indiana, makes truck trailers. Some of its trailers are specialized, such as refrigerated trailers and tankers.
Truck trailer manufacturing is highly cyclical. Wabash had hideous losses in 2008-2010. That’s why valuations are modest even though recent profits have been strong. The stock has popped more than 60% in the past 13 weeks but it still sells for only 11 times earnings.
With trepidation, I recommend United Therapeutics (UTHR), whose specialty is drugs for pulmonary hypertension. I feel nervous because the rules of the came for health care in the U.S. are up for grabs, and because insurance companies and the government are getting tighter about paying for drugs.
But I consider United Therapeutics a good buy. It is debt free, and has shown strong revenue growth over the years. The stock goes for 11 times earnings.
Speculatively, I recommend TopBuild (BLD), based in Daytona Beach, Florida. The company distributes and installs insulation. It also carries other building products such as fireplaces, garage doors, gutters and shower stalls.
Many pundits expect construction to get a boost under the Trump administration. While this thinking is simplistic, I think it is also probably right. TopBuild is up about 25% in the past 13 weeks, but still sells for 14 times earnings and 0.8 times revenue.
Also as a speculation, I recommend Dorian LPG (LPG).
If you’ve ever barbequed using a propane tank, or used a butane lighter, you have used liquefied petroleum gas. Dorian, based in Stamford, Connecticut, transports this highly flammable stuff.
Dorian has plenty of problems, including $776 million in debt. Short sellers are actively betting against the stock. But it’s mighty cheap — 9 times earnings and 0.6 times stated book value (corporate net worth per share).
Disclosure: I own Sanderson Farms personally and for almost all my clients. I own First Solar for one client.