American Railcar and HCI Group Could be Undiscovered Gems
Posted: April 18, 2016
Attention, lovers of small stocks. Here are five small-capitalization stocks that I think qualify as undiscovered gems.
American Railcar Industries Inc. (ARII), a railcar manufacturer based in St. Charles, Mo., leads off the list. Financier Carl Icahn owns a significant stake here, which is interesting to me since he often prefers larger companies.
According to Gurufocus.com, other big-name investors in American Railcar are Mario Gabelli, Paul Tudor Jones, Chuck Royce and Murray Stahl.
The stock trades for only seven times earnings, a ratio I love. That’s because analysts expect the earnings to drop this year, and to fall further next year.
I think the analysts may be underestimating the railroad industry’s prospects, and hence the demand for railcars. Railroads are a fuel-efficient way to carry freight, which may not matter a great deal now with energy prices cheap, but could matter a lot more in the future.
Astronics
From East Aurora, N.Y., comes Astronics Corp. (ATRO), a supplier to aerospace and technology firms such as Apple, Boeing and Panasonic. It makes a wide variety of parts, such as aircraft and airfield lighting systems, seat-motion controls, antenna systems, test equipment and training simulation devices.
The three customers mentioned above accounted for about half the company’s sales in 2014. That kind of concentration is a bit risky, but I’ve seen a lot worse.
The stock sells for 14 times earnings, which I consider reasonable given that the company has increased its book value (corporate net worth) by an average of 18 percent a year the past five years.
Global Sources
Global Sources Ltd. (GSOL) of Hamilton, Bermuda, attempts to help U.S. companies to do business in China and vice versa. To this end, it offers information, runs trade shows, and consults on advertising and marketing.
Global Sources’ revenue has grown at a 10 percent clip the past 10 years, and 15 percent in the past 12 months. But its revenue peaked in 2012 at about $232 million and was only $173 million in the past four quarters.
China’s economy has slowed down, and U.S. companies have begun to worry more about accounting problems, cultural differences and China’s hardball government.
A few Wall Street firms used to cover Global Sources, but they have given up and it is virtually unfollowed now. At 13 times earnings I consider the stock risky but interesting.
HCI Group
I have mentioned HCI Group Inc. (HCI) of Tampa at least twice before in this column, in columns about cash flow and about dividend appeal.
The initials HCI come from the company’s main subsidiary, Homeowners Choice Property & Casualty Co. In addition to insurance, the company is involved in real estate and reinsurance.
As you might expect with a property and casualty insurer that does much of its business in hurricane-prone Florida, profits are inconsistent. Still, the company has posted a return on stockholders’ equity of 20 percent or better in six of its eight years as a public company. The dividend yield is 3.6 percent.
Lydall
Lydall Inc. (LDL), with headquarters in Manchester, Conn., makes filters, acoustical barriers and insulation systems. So far as I can tell it is completely uncovered by Wall Street.
Because the company is little-known and its product lines are unglamorous, the stock sells for 13 times earnings even though operating income has grown rapidly in the past few years. Return on equity was handsome at 20 percent last year.
Past performance
Because I’m fond of small stocks, I’ve written 22 columns since 1998 devoted to small-stock recommendations. I’ve tabulated the results for the 17 columns since March 2000.
On average, my picks have returned 16.3 percent, compared to 9.2 percent for the Russell 2000, a small-stock index, and 6.4 percent for the Standard & Poor’s 500, a large-stock index. All figures are total returns including reinvested dividends.
My selections have outperformed those two benchmarks 11 times, and trailed six times.
Last year was one of the duds. Hanmi Financial Corp. (HAFC), a bank catering to the Korean community, returned 8.1 percent but it was the only winner. The biggest loser was Wildan Group, a consulting firm, down 30.5 percent. Panhandle Oil & Gas Inc. (PHX) and Modine Manufacturing Co. (MOD) were also in the loss column.
Collectively, my four picks from last year declined 14.0 percent, compared to a loss of 9.5 percent for the Russell 2000 and a gain of 1.6 percent for the S&P 500.
Bear in mind that results for my column picks are theoretical and don’t reflect actual trades, trading costs or taxes. The record of my column selections shouldn’t be confused with the performance I achieve for clients. And past performance doesn’t guarantee future results.
Disclosure: I own shares of Astronics for one client. Otherwise, I have no positions in the stocks mentioned in today’s column for myself or clients.