A Rebound in Detroit

 | Aug 16, 2012 | 5:00 PM EDT  | Comments
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alv

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When most people think of a city having a renaissance, Detroit does not likely come to mind. Sure, it has its iconic Renaissance Center, headquarters of General Motors (GM), but the view of Detroit, and Michigan in general, is of a city and state in decline. That view is not entirely unfounded. Detroit's population in the mid-20th century was nearly 2 million;  today it's just north of 700,000.

But before you write off Detroit and the entire state of Michigan as economic wastelands, I can tell you from personal observation that Detroit is undergoing a renaissance. I recently visited Detroit's waterfront, which is three miles of beautifully revitalized recreational walkways and bikeways. This waterfront is leading the way to the revitalization of the city. The city is on the rebound. (And I can't say enough about the food at the famous Slows Bar BQ, where I was invited to dine by the owner, Detroit entrepreneur Phillip Cooley.)

My overall impression of Detroit and Michigan is that the area's economy is undergoing a recovery. My visit got me interested in seeing if any publicly traded Michigan companies are perhaps undervalued and worth investing in.

Using the computerized guru strategies I created to find good investments (based on the investment strategies of well-known Wall Street strategists), I did found three Michigan-based companies, two in the Detroit area and one in Midland, worth considering.

The Midland stalwart is chemical giant Dow Chemical (DOW), which has customers in 160 countries and sales of $60 billion. This is a favorite of my James P. O'Shaughnessy strategy, which highlights Dow's large market cap of $35 billion, positive cash flow per share, large number of outstanding shares and huge sales. The strategy takes all the companies that pass over the hurdles I just mentioned and picks the top 50 based on their dividend yield. With a yield of 4.35%, Dow makes it into this elite group.

Autoliv (ALV), a Swedish-American company with U.S. headquarters in the Detroit suburb of Auburn Hills, makes automotive safety systems such as airbags and seat belts. The company claims to have a bit more than a third of the global market for car-occupant-restraint products. I applied a strategy I devised based on Peter Lynch's investment approach, and it indicates that now is the time to make Autoliv a safe investment haven. This strategy uses the price-earnings-growth ratio, which is PE relative to growth and measures how much the investor is paying for that growth. Autoliv's PEG is a very strong 0.50 (up to 1.0 is acceptable). The company's low debt level is also a factor in this Lynch-based analysis.

Valassis Communications (VCI) is based in the Detroit suburb of Livonia. A media and marketing services company, it delivers coupons and other marketing via traditional mail, newspapers, the Internet and in stores. Its best-known advertising platform is RedPlum, and the company claims to reach 100 million households each week. Joel Greenblatt devised a two-variable strategy that I have automated. One variable is earnings yield, and the second is return on total capital. The strategy ranks stocks by each variable from among all the stocks in our database, and then creates a final ranking. Of the thousands of stocks in our database, according to the Greenblatt strategy, Valassis ranks a strong 35.

So don't believe everything you read; reports of the economic demise of Detroit and Michigan are a case in point.

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