Betting on the Jobs Act

 | Sep 16, 2011 | 10:30 AM EDT  | Comments
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Stock quotes in this article:

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rol

President Obama proposed the American Jobs Act to stimulate job growth. Of course, it is too soon to know what parts of his proposal Congress will approve, but what the president proposes suggests that at least some businesses might benefit from increased government spending.

The jobs act includes spending on infrastructure projects, including the modernization of roads, rail, airports and waterways, as well as schools, and the rehabilitation of homes and businesses that have suffered as a result of the real estate downturn. A cut in the payroll tax for a company's first $5 million in wages is to encourage hiring workers; this measure is aimed at small businesses.

While we cannot know which companies will see their business improve as a result of the American Jobs Act, investors willing to take a chance could buy into those companies that seem to have a reasonable chance of benefiting from this program.

Construction is an obvious potential winner. Primoris Services (PRIM) is in a good position to benefit as it provides construction, fabrication and engineering services to public utilities, energy companies, municipalities and others, and is a good choice as a potential beneficiary of the jobs bill

The Primoris play is supported by a strategy I have created based on the writings of Kenneth Fisher. (I use the approaches of time-proven, Wall Street gurus to find good investment opportunities.) This strategy particularly looks at the price-to-sales ratio (P/S) to find bargain-priced stocks, and a P/S of 0.75 or less is considered a tremendous value. Primoris' P/S is a very low 0.41. The company also boasts a moderate amount of debt, a strong, long-term earnings per share (EPS) growth rate, positive free cash flow per share and an acceptable three-year average net profit margin of 5.07%.

Another potential winner is UniFirst (UNF), which provides workplace uniforms and protective work wear clothing. The company services more than 240,000 customer locations in Canada, the U.S. and Europe. Customers include Goodyear (GT), 7-Eleven, Safeway and Midas (MDS). If the American Jobs Act aids in a boost to hiring, UniFirst's business should be lifted, too.

Benjamin Graham was arguably the first to create a comprehensive investment strategy, and the computerized approach I based on Graham's writings supports UniFirst. Among UniFirst's desirable attributes are its sizable sales ($1.1 billion), high liquidity (a current ratio of 2.34:1), long-term debt that is only about half of net current assets, EPS that have increased in each of the past five years, and a moderate price-to-earnings (P/E) ratio of 13.3. In addition, the strategy multiplies the price-to-book ratio (P/B) by the P/E and requires the result not be greater than 22. UniFirst has a P/B ratio of 1.24:1. When multiplied by the P/E, this comes to a desirable 16.49.

A goal of the act it to get abandoned and troubled properties into shape and back on the market. Rollins (ROL) could well benefit from this aspect of the bill. The company provides termite and pest control through Orkin Exterminating and other subsidiaries. Warren Buffett is Graham's most famous student, and I have based a strategy on Buffett's investment approach, which likes Rollins.

This strategy requires a company be a major player in its industry, as is Rollins. The company has no debt, a robust return on equity and return on total capital over the last 10 years (28.3% for both), and positive cash flow per share. In addition, the strategy projects that the investor, when buying at the current stock price, will earn an annual rate of return on their investment of 14.8%, which is very good, indeed.

Buying today in anticipation of increasing business tomorrow is a risky bet, but these companies look very desirable. Not only could they benefit from the jobs act, but they are good investments on their own, as judged by their high grades earned from my guru strategies.

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