After reading a blog post on value creation/destruction by Aswath Damdaran last week, I sent you into the weekend with a list of companies where management was destroying rather than creating value for shareholders. Today, we will stand that on its head and look for companies where value is being created as a result of a really good business or really good management.
Often you find both are present in the real value creators out there. I looked for companies where the return on invested capital exceeds the weighted average cost of capital by a significant margin. I wanted to make sure this was a consistent performance so I also added criteria for five-year book-value growth.
This is an incredibly interesting list of companies. All the usual suspects are on there, like Apple (AAPL), Alphabet (GOOGL), Microsoft (MSFT), Priceline (PCLN), Oracle (ORCL) and other large, well-known companies that have a good business with strong management overseeing the operations and reinvestment of profits. Because I am a value type at heart, I looked a little further for those that I could currently buy at an EV/EBIT ratio that is half or less the average market multiple. I found that this combination created a fabulous list of stocks worth considering as long-term investments. (Apple and Alphabet are part of TheStreet's Action Alerts PLUS portfolio.)
There are some fascinating companies with what appear to be fantastic businesses on this list. HFF Inc. (HF) is in the commercial real estate business in a big way. The company calls itself a real estate capital intermediary and does everything from helping with financing, selling properties, finding equity investors, placing debt, raising equity capital for commingled real estate funds, loan servicing and providing advisory services. Growth has been impressive and it has gone from an unranked firm in 2001 to the No. 3 commercial real estate broker.
This is a great story and one of those rare cases where the numbers support the story. Return on invested capital exceeds the cost of capital by a wide margin and book value has grown a compounded rate of over 17% the past five years. Best of all, the stock is very cheap as the shares trade with an EV/EBITDA ratio of just 6.84.
TRC Companies (TRR) is very interesting. It is an engineering, environmental consulting and construction management firm that provides integrated services to the energy, environmental and infrastructure markets. Its markets all look poised for significant growth and TRC just took advantage of weakness in the energy space to buy the professional services business segment of Willbros Group (WG), allowing it to add pipeline services to the business mix.
TRC is involved in alternative energy and just signed a deal with BQ Energy to develop the PatterSun solar installation. The project is a megawatt-scale solar energy farm constructed on the surface of a capped landfill in Patterson, N.Y. The power markets should be particularly attractive as a result of the EPA's Clean Power Plans. TRC will be involved in both the construction of natural gas and alternative-generation plants and should also see work from the demolition and cleanup of coal-fired plants in the years ahead.
Business is very good, backlogs are up and management has been performing at a very high level with five-year book-value growth of 35% annually and a return on invested capital that is well above the cost of capital. The EV/EBIT ratio is just 6.6, so you are buying a very nice business at a very attractive price.
Vasco Data Security International (VDSI) makes the list and it is getting harder to talk myself out of buying this cybersecurity leader. Vasco is the world leader in providing two-factor authentication and digital signature solutions to financial institutions. More than half the world's largest 1,000 banks use its technology. Vasco also helps provide secure access to data and applications in the cloud, and provides tools for application developers to easily integrate security functions into its Web-based and mobile applications.
The customer base for these products includes financial, enterprise, e-commerce, government and health care markets. Book-value growth has been solid at 12% a year and returns are well above costs. The current EV/EBIT ratio is 7.2 and in the next substantial market pullback I think I will have to buy the shares. Cybersecurity is one of my 100-to-1 hunting grounds and Vasco is a leader in the space that is selling at an attractive price.
I spent a lot of time this weekend using the information in Damdaran's blog post and found a lot of very useful information that can help us make money in the markets for years to come.