Finding Investment Gold in Steel City

 | Jan 29, 2013 | 11:00 AM EST
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There was a time when Pittsburgh was an economic powerhouse, home to steel mills and major corporations such as Westinghouse and Gulf Oil, neither of which exists in their original forms. Then the city fell into decline, a classic rust-belt story.

But Pittsburgh has been on the upswing for years. It's been rated in the top 10 places to live. Health care and education are major economic drivers, powered by two highly regarded universities, the University of Pittsburgh and Carnegie Mellon University. Major corporations still call Pittsburgh home, including Heinz (HNZ) and PPG Industries (PPG).

I have been thinking of Pittsburgh recently because I made a trip there last week and was impressed by the city's vitality. I also enjoyed the film Jack Reacher, with Tom Cruise, which was filmed in Steel City.

Two Pittsburgh-area companies earn high marks from my guru strategies, which are based on the writings of some of Wall Street's most successful investors and mirror how they invest.

One pick is rue21 (RUE), headquartered in the Pittsburgh suburb of Warrendale, Penn. It operates 853 stores in 46 states and sells clothing targeted to youngsters. The strategy I created from the writings of James P. O'Shaughnessy indicates that now is a good time for investors to start sporting the rue21 brand. The strategy focuses on the company's $724 million market cap, increased earnings per share in each of the past five years, and a price-to-sales ratio of 0.85, well below the 1.5 threshold (the ratio measures how well-priced a stock is based on sales). The final step takes all the companies that pass these three hurdles and identifies the top 50 based on relative strength. Rue21's relative strength of 73 puts it into this cohort and earns it a strong showing based on the O'Shaughnessy strategy.

Kennametal (KMT) is a global supplier of tooling, engineering components and other materials used in production processes. It sells into such markets as aerospace, energy, transportation and machine tools from its suburban Pittsburgh headquarters in Latrobe, Penn. This company is a favorite of my Peter Lynch-based strategy, which emphasizes the price-earnings-growth ratio. Based on the PE ratio relative to growth, this measures how much an investor is paying for growth. A maximum PEG of 1.0 is allowed, and Kennametal's yield-adjusted PEG is a solid 0.81. Also in the company's favor is its reasonable amount of debt and the good job it is doing managing inventories.

You don't have to be a Steelers or Pirates fan to like these Pittsburgh players. Both companies offer solid investment opportunities.

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