Kicking Rocks to Find Perfection

 | Mar 28, 2012 | 2:30 PM EDT
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I spend a lot of time thinking about ways to uncover stocks that have the potential for returns measured in multiples not percentages over time.

Although my basic approach to finding these stocks is based on buying assets on the cheap, I like to wander around and kick tires and turn over rocks in the market to see if I am missing anything.  I broke out my screener this morning and went so if I could find any "perfect stocks" based on earnings, sales and dividends. I looked for companies that were profitable and had shown earnings growth over the past year and past five years and the latest quarterly earnings comparison was also higher. Sales had to be higher year-over-year and past five years as well. The company had to pay a dividend, have insider ownership of at least 10% of the company and have a manageable amount of debt on the books.

Very few companies make the final cut right now. This is not surprising given the very slow economy of that past five years. Just 17 stocks made my final screen. Even fewer came even close to passing through my valuation model. I use a variation of the pricing model first developed by Ben Graham and most of the stocks on the list were overvalued by a large factor. But a few traded near or below intrinsic value according to my formula and may be worth a deeper look from long-term investors.

Weiss Markets (WMK) is an East Coast grocery store chain with a total of 1,612 stores in Pennsylvania, Maryland, New York, New Jersey and West Virginia. In 2011 the company recorded a strong performance in the very competitive grocery business. Sales were up 5% and comparable stores posted a solid 4.2% increase over 2012. Operating income was up as were earnings per share. Over the past five years the company has grown sales and earnings by right around 5% annually on average. The stock has moved higher along with the market this year and now trades right at my intrinsic value number. Given the consolidation we have seen in the industry this year, an offer for the strategically located chain would not be a shocker. Insiders own almost 60% of the company, so it would have to be an attractive offer. The stock yields 2.7% at the current price and would be a solid buy candidate if the market slips backwards over the summer.

Future Fuel (FF) started life back in 2005 as a special purpose acquisition company (SPAC). Interestingly it is one of the few SPAC offerings that actually made a successful acquisition and was not pushed into liquidation by those of us playing the SPAC arbitrage game back in 2006 and 2007. The company manufactures chemicals for a wide range of uses and also has a division engaged in the manufacturer of biofuels. The currently process about 60 million gallons of year of biodiesels from beef tallow, soybeans and pork lard. The company had a solid year in 2011 with revenues up 41% and profits rising by 35%. The chemical division was down slightly for the years all of the growth came from the biofuel division of the company. As biofuels continue to grow and the chemical division recovers along with the economy this company should have solid earnings growth going forward. The once caveat here is that the company has an at-the-market stock offering registered with Steifel Nicholas and has been selling shares from time to time. Insiders won 60% of the shares and the stock yields a respectable 3.6% at today's price. The stock is slightly undervalued at 90% of my intrinsic value calculation.

I am not in a big rush to buy anything right now as I prefer to buy down markets. In spite of that, rock kicking in the stock market is a full-time effort. These two stocks both have shown solid performance in a weak economy and could see strong earnings growth in a stronger economic recovery.

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