Five stocks for the fundamentalist faithful

 

Today, America greets the new year after a tumultuous, contentious, and difficult end to 2016, and self-directed investors have suffered their share of the chaos.

But enough of these pointless reminiscences, the new year unfolds before us and there is money to be made! The chaos of 2016 has done nothing to alleviate our need—all of our needs—for solid future returns, and if it has reminded us that our finances are not invulnerable, so much the better: we generally do better when we stay away from in-and-out trading and betting too much on speculative issues.

Fortunately, while times change, the principles of fundamental stock analysis remain the same. You always want to look for companies with steadily rising revenue and earnings. You also want to make sure that the company’s valuation isn’t too high, which means comparing it to other companies in its industry. I tend to invest in industry leaders, but smaller companies can also be solid investments—particularly when they have higher profit margins than the industry leaders, as that means the industry leader can’t drive it out of business just by lowering prices for a while.

Even stocks in earnings decline, or stocks that are losing money, can be great investments, but in these cases, you really need to roll up your sleeves and examine every facet of the company. If you can see a clear path back to rising earnings, you could still have fundamentally strong stock.

Today, I’m looking at five stocks with strong underlying numbers, though be warned, some of these are volatile nonetheless—you didn’t think “fundamentally sound” meant “boring” did you? As always, remember to treat these ideas as just that, ideas, and do your own research before investing.

US Concrete (USCR)

Sometimes investors dismiss construction materials companies as hopelessly old-school, old-economy companies with constant competition and narrow profit margins, so it is entirely understandable if concrete sounds a little boring to you. Before you go, though, the hook for US Concrete is that a mere $10K invested five years ago would today be worth $225,862.

Quarterly revenue is growing at 11.3% year over year, and quarterly earnings are growing at the preposterous rate of 2,244%, year over year. (Anomalous ratios like this indicate only that EPS in the year-ago period was about $0.1.) The forward P/E of 16.77 is simply preposterous given this rate of growth, but don’t worry—it is not even close to being the lowest on the list.

USCR
Chart courtesy of www.stockcharts.com

AV Homes (AVHI)

AV Homes builds homes in Florida, Arizona, and the Carolinas. With its market cap of just $370 million, it’s a bit player compared to the industry big names such as D.R. Horton (DHI), KB Home (KBH), and Lennar (LEN), but at the rate it is growing, that may not be the case for very long. Many analysts and individual investors are watching this one closely, and here’s why: in 2011, the company brought in revenue of $89 million, while with one quarter left to be reported on, it appears that the company’s 2016 revenue will be $743 million. Also, after turning profitable in 2015 and earning $0.54 per share, the company is on track to do just a bit better this year and earn $5.81 per share. Yeah, a 10X EPS gain gets people talking.

But so far, not so many as to push shares of AVHI out of the value range, as indicated by the fye P/E of just 13.29.

AVHI

Chart courtesy of www.stockcharts.com

Drew Industries  —OR—  LCI Industries (LCII)

Drew Industries is a $2.65 billion company that makes manufactured homes and recreational vehicle. The company trades at a relatively low P/E of 22, most likely because manufactured homes have been out of favor with investors for several years on the fairly sensible grounds that communities have gradually turned away from manufactured homes as a solution their low-cost housing needs, and as a result, new parks aren’t being built. Old ones, however, are proving tenacious, and as for the recreational vehicle industry, it continues to grow rapidly.

Which side of the business has had the biggest effect on the bottom line? Well, let’s look at the numbers. Quarterly yoy revenue growth is 19.4%, and quarterly yoy earnings growth is 72.9%. The company even has a dividend yield of 1.86% annually. One caution, lest anyone buy the stock and then lose track of it: As of the beginning of the year, Drew Industries changed its name to LCI Industries and its ticker symbol to LCII.

LCII

Chart courtesy of www.stockcharts.com

YY (YY)

YY is a Chinese social networking site, and while it seems a bit strange to westerners, its popularity with the Chinese in nothing short of phenomenal. YY is hard to define, since it combines live entertainment, dating, music, and many other elements. Don’t imagine this company is ever going to be popular in America, where meeting a prospective mate or aspiring celebrity online in order to sing with him/her strikes people as just too weird, but there is nothing else like it, and it fills an important niche in China.

And the numbers here are just incredible. Profit margin: 17.20%. Quarterly revenue growth: 40%. Quarterly earnings growth: 156%. Finally, check out the stunningly low P/E of 12.

At this point, experienced investors have to be asking “What’s the catch?” Well, the company has $4.181 billion in debt, but that’s less than half of the value of its assets, in fact, YY has enough in cash and short-term investments, $4.377 billion, to pay its debt off. There’s also the matter of a tiny earnings decline in from 2014 to 2015. Those growing pains seem to be gone now, however, as with one quarter yet to be reported, analysts are expecting a 30% EPS increase in 2016 and forecasting a 31% increase in 2017.

YY

Chart courtesy of www.stockcharts.com

Enstar Group (ESGR)

Enstar is an insurance and re-insurance company, and though its earnings have fallen slightly in the last two years, its revenue growth has been truly remarkable. As reinsurance companies are often where the buck stops, they can take a beating when times get truly desperate, which of course they did in 2008, causing shares of ESGR to lose more than half their value. Since then, however, the share price has been advancing at a considerable pace, particularly in 2016.

Enstar’s third quarter earning shocked the Street, and shares of ESGR rose from $167 to $200. Whose to say it won’t do the same again when it next reports in early February?

ESGR

Chart courtesy of www.stockcharts.com

Symbols: AVHI ESGR LCII USCR YY
Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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