Two Lesser-Known Industrials to Watch

 | Oct 23, 2012 | 2:30 PM EDT
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I am hearing all kinds of chatter about the market breaking support levels and breaking through various chart lines this morning. The technicians I know are getting nervous as the market sells off, and they probably should be.

I am no technician, but these earnings are the flavor of awful. We are seeing revenue shortfalls and poor guidance for the fourth quarter, and that does not bode well for the stock market in the near term, in my opinion. Being me, I hope we get a good solid selloff that creates lot of bargains, but as always, I will wait to react rather than try to make a predictive bet on stock market movements.

As the market swirled around me this morning, I sat down and ran some basic screens. One of my favorites is a combination of approaches drawn from experience and research. I combined several theories this morning and looked for stocks trading below book value with both a double-digit earnings yield and return on equity. After looking at the list, it was apparent that many stocks that meet these criteria had leaped already this year, so I added one more criterion to my search. I looked for stocks that had not made a big price move or were actually down over the last year.

There are some old favorites on the list. I am still a big fan of Tesco (TESO) at this price. The oil-services company has been less than a stellar performer this year, as the stock has fallen 10% in the past quarter and more than 30% in the past year. The slowdown in drilling activity has kept a lid on profits, but I am confident that a pickup in oil and gas demand will lead to higher sales and profits for the company and that the stock will follow higher.

Tesco has had production issues with its top-drive units that power drilling rigs. Those issues have slowed sales, but they should be resolved by next year, and orders will pick up once again. The company is also seeing a pickup in deep-water casing running work, and that will be a huge boost, as deep-water is the most robust segment of the drilling market right now. The sale of its casing drilling division to Schlumberger (SLB) should lead to strong demand for Tesco's products as well.

The company has had a few short-term negatives, but its future is very bright, and its stock should become a solid growth name. It is cheap enough to buy if you do not already own shares, and I would be a scale buyer on any future weakness in the stock.

One microcap stock really stands out to me a potential bargain issue right now. Core Molding Technologies (CMT) makes reinforced molded plastic products primarily for the automotive and truck industry. The biggest flaw I see with the company is that two of its customers account for a significant portion of its business. Sales to Navistar ([ticker]) and Paccar (PCAR) account for about 75% of Core Molding's sales. Core Molding has good relationships with both companies, but it is also trying to develop new relationship to diversify its customer base. Navistar actually has a seat on Core Molding's board of directors and owns 9% of the outstanding shares, so I suspect that relations will stay strong for a long time.

The stock is cheap on the numbers. Core Molding sells right at tangible book value and at 50% of my estimate of intrinsic value. The enterprise-value-to-EBITDA ratio is just 3.9, a level that could attract interest from a strategic or financial buyer. The company has very little debt and produces a consistently solid return on equity. It would be a natural fit for a private-equity buyer or larger OEM supplier to the trucking business. Insiders own enough stock to be motivated to perform but not enough to stop a takeover. Even if a takeover never materializes, the company should do very well in an economic recovery.

Keep in mind that I am not in any huge hurry to be a big buyer of stocks. I own shares of Tesco and will buy more if it fall further as the market declines. I do not own any Core Molding yet but would be a motivated buyer if it sells off to a discount to tangible book value. I will try to exercise patience and buy cheap stocks like these two in reaction to a further decline in stock price.

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volatility is quite low here, and we could see some downsides here in the short term. ...



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