Screening Stocks, Not Beach Frolicking

 | Jul 05, 2013 | 12:00 PM EDT  | Comments
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Stock quotes in this article:

tis

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ccf

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eml

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rfil

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twi

I am happy to report that I have managed to avoid almost all aspects of frolicking while here at the beach. I may have gotten a little fishing in, but there has been no over beachfront frolicking.

One of the major reasons for this is that I bought a large stack or work-related reading material and used that as an excuse. I have spent much of the week working and reading on the deck, which is my idea of a vacation. I have a policy of reading everything, but especially material from successful investors whose viewpoint and approaches are different than my own. As a result, I read about the recent activities of a friend who is a momentum investor. I was interested to see that among his latest picks is Orchard Paper Products (TIS).

I suggested this company last year for more growth-oriented investors and ended up liking the stock so much I got my kids to buy some for their account. Orchard is in a pretty basic business but I found them by running a screen for dividend-paying companies with solid earnings growth over the past five years and for relatively low institutional ownership. Of the three stocks I recommended in that column in March of 2012, Orchard and Chase Corp. (CCF), are up well over 50% and Eastern Company (EML) is basically flat. That's a pretty decent result, so I decided to run the screen again today.

I came across two interesting little companies that seem to fit the bill for those with a little less intense asset focus than my own. These are solid companies with strong balance sheets and prospects. The first, RF Industries (RFIL), is one of my favorite types of companies. They supply needed equipment to a fast-growing industry. The company makes equipment used by the radio and communication industries and it is seeing strong results as the result of the continued build out of Wi-Fi networks in the United States.

Their products include such things as coaxial connectors, cable assemblies and wiring harnesses used by a wide range of industries. Their newest product is a hybrid power and communications babe for wireless providers building out a 4G network. That product is seeing strong sales.

The stock is pretty cheap at 10x earnings compared to a five-year earnings growth rate of 17%.  Growth is accelerating as the economy recovers and companies are once again building out their networks to keep up with demand. Last quarter, the company reported earnings 75% higher than the year ago quarter.

Management also authorized a hefty dividend increase and the shares now yield 4.84%. They have no long-term debt and about 20% of the market cap is in cash, so they are financially strong. When I crunch the numbers I come up with a going- concern value of $7.10, so at the current price they are 80% of intrinsic value. Institutions have been avoiding it as it a smaller company and own just 19% of the shares. I will be telling the kids to buy this one as well.

Titan International (TWI) makes a pretty basic product as well. The company manufactures wheels and undercarriage assemblies, primarily for off-road vehicles. Their products are used for vehicles in the agricultural, construction and consumer markets. They show up in everything from giant earthmovers and tractors to golf carts and off road recreational vehicles. Growth has been robust with 27% earnings growth the past five years. It has slowed this year as spending in the heavy construction, mining and agricultural markets has slowed. As there is a defined replacement cycle for these products, this is spending delayed, not spending cancelled in my opinion.

The stock trades at just 11x earnings and at just 70% of my $22.75 calculation of intrinsic value. They have a bit more debt that I usually like but this is offset by more than $550 million of available cash. When the economy turns and spending in their major markets resumes this company could easily be a leading growth stock and show up in my friend's momentum portfolio.

When the kids finish their frolicking in the surf, we have a lot to talk about. Given their prospects and sound financial condition, these two stocks seem underpriced and worth owning for more earnings-focused, long-term value investors.

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