Watching My Watch List, Part 2

 | Jun 05, 2014 | 4:30 PM EDT  | Comments
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Stock quotes in this article:

wfm

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bks

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esp

To see Part 1 of this column, please go here

While my investment portfolio is concentrated by Wall Street standards, my watch list of potential investments is very, very broad. I use a watch list as the first round of my stock-screening process. If I find a business that I understand and which has the ability to generate growing cash flows, I add it to the list. Once a stock is on the list, I watch it, study it and take special care to notice if the price drops to create an attractive valuation.

Whole Foods (WFM) is coming very close to doing that for me. Trading at $38, the shares are near a 52-week low and off from nearly $70 several months ago. My view on Whole Foods is very similar to my view on Chipotle Mexican Grill (CMG). Whole Foods is a fantastic business with enormous growth. Shares trade at 25x earnings, and that is not an unreasonable multiple to pay for such future growth. The company operates about 400 stores, and it sees 1,200 stores or more as a realistic possibility.

After reading an article in Barron's, I'm considering Barnes & Noble (BKS) as a sum-of-the-parts play. Despite Amazon.com (AMZN), I do believe there is more than enough room for one major brick-and-mortar retailer of books, and that is what Barnes & Noble is today. At $19 a share, the stock is up nearly 50% from its low, and if shares pull back again, it will be a very enticing decision. Management seems to understand the sum-of-the-parts equation and is probably looking into some sort of split-up. While that is not directly relevant, it doesn't hurt Barnes & Noble's cause that Amazon is currently in dispute with a major publisher. Such negativity could be a backdoor boon for Barnes & Noble, as Amazon's pricing could be affected.

Moving over into micro-cap world, Espey Manufacturing and Electronics (ESP) is a $51 million designer and manufacturer of electronic equipment for military and industrial applications. The company has no debt and $13 million in cash. Year to date, shares have fallen 30% as earnings appear to be heading for a year-over-year decline (its fiscal year ends June 30). The company has a very healthy balance sheet and has been in business since 1928. Espey seems to be a very niche-oriented business, and it's a perfect watch-list candidate to see if shares continue to contract further and whether or not the business can truly grow or if the company simply serves a non-growing market.

As investor Howard Marks has keenly observed, an inferior asset can be a superior business at the right price. Having a growing watch-list is an excellent way to finding both superior and inferior assets and waiting for the price to become attractive to create a great investment opportunity.

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