Rock-Solid Names That Fly Under the Radar

 | Apr 15, 2013 | 3:00 PM EDT  | Comments
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For months now, headlines have touted the strong performance and value of "quality" stocks. In the majority of these articles, the word "quality" has been almost synonymous with "blue-chip" -- and, yes, "quality" can indeed refer to the biggest or most widely recognized businesses. In periods of uncertainty or slow growth, corporate behemoths like Coca-Cola (KO), Wal-Mart (WMT) and Kraft (KFT) do have the financial wherewithal to navigate the storm and keep shareholders afloat until the cycle turns.

Yet quality doesn't necessarily mean the biggest or the most recognized. "Size" is a very relative term when it comes to investing. To me $5 billion is big -- just not quite as big as $50 million. "Quality" can also mean a strong business model and balance sheet, and a history of solid performance -- attributes that can all be achieved whether a company is working with tens of billions or hundreds of millions of dollars. One thing is for certain: Quality holds tremendous value and means that, over time, the business can be counted on to deliver. 

Advance Auto Parts (AAP), one of the nation's top automotive-parts retailers, remains tops on my list in terms of quality. At $83 a share, moreover, the stock remains undervalued relative to its peers, trading at 97% of sales vs. 180% for O'Reilly (ORLY) and 160% for AutoZone (AZO). Similar to AutoZone, Advance Auto is furiously buying back stock, which gives shareholders a bigger piece of the pie. When we see strength in new-vehicle sales, the market loses interest in auto-parts retailers that benefit from older vehicles that need parts. But Advance Auto Parts is holding strong, and I believe it will continue to perform well for years. 

Valassis Communications (VCI), meanwhile, is one of those names everyone worries about except for the shareholders who own the stock. This company essentially dominates the market for newspaper inserts -- and whenever you receive that bulk packaged of colorful coupons in the mail, odds are that Valassis has put it together. Perhaps this business is no longer in growth mode, but I don't see it dying anytime soon, either. Mailings are still a powerful way to distribute advertising, especially for cost-conscious consumers. Valassis pays a 4.5% yield and trades for 10x earnings -- and, yes the company is expanding to the Internet. 

Finally, small-cap SteinMart (SMRT) remains one of the better-run retailers, in my book. The debt-free balance sheet has also allowed the company to reward shareholders with special cash dividends on numerous occasions. With market capitalization of $350 million, and $100 million in cash, there are plenty more opportunities for further dividends down the line. More important, SteinMart offers brand-name fashions at steeply discounted prices, a value proposition that consumers today demand more than ever. 

Big or small, quality can be found across the spectrum. Over the years, high-quality businesses -- when purchased at sensible prices -- have proven to be resilient preservers of investor capital.

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