My Twitter feed over the weekend and continuing into this morning is full of chatter about what a busy week this is going to be on the economic and earnings front. I am sure reams will be written about earnings expectations for Apple (AAPL), Twitter (TWTR), LinkedIn (LNKD) and Yelp (YELP) this week. Oceans of ink will be spilled pondering the Fed meeting results and where each comma and period will be placed in the news release following the meeting.
I have very little to add to that conversation and will do my best to ignore all the hype and chatter. I can only hope that someone releases some pint of news that sparks an inventory creation event, but that seems unlikely right now. I will just keep my head down and continue searching and testing.
This weekend, while watching the Orioles take a series from the Red Sox, I tested a few ideas that I have used in the past in my search for profitable investment ideas. One idea that I have used in the past is the concept of undiscovered growth stocks. Finding stocks that are growing at a high rate and are undiscovered by Wall Street is an idea which -- while I don't use it in my own portfolio these days -- I have taught and preached to my kids and younger acquaintances. I did some serious testing of the idea this weekend and found that it did indeed handily beat the market over the last five, 10 and 15-year time periods.
I sat down this morning and ran a screen to find stocks growing at better than 15% a year, with a price to earnings ratio of less than 20. I then filtered that list of find those that were under-owned by large institutions.
The first thing I noticed about the screen is that it is dominated by my favorite sector. The continued credit improvements and slow recovery in the economy are combining to produce boom times for community bank stocks. Of the 139 undiscovered growth stocks, 52 were community banks. The industry improvements and continued stock buybacks at or below book value are driving growth in the sector, and banks we were buying on the cheap over the past few years are moving into phase two of the trade of the decade and can be considered growth issues. I talk about banks all the time, so for today I will limit my comments to mentioning that if you do not have a generous helping of community banks in your portfolio I think you are making a huge mistake.
SJW Corporation (SJW) is one of the more intriguing companies on the list. This company is in the water business in Texas and California -- two states with serious drought-related problems. SJW also has a real estate portfolio consisting of undeveloped land and commercial buildings in California, Texas, Arizona and Tennessee. The company has been growing at a nice pace and, as the supply and demand picture for fresh water drives prices higher in the years ahead, it should benefit. The ongoing real estate recovery is also helping it grow profits and its asset base. It just raised the dividend and the shares yield 2.56% at the current price. Institutions own just 56% of the company, so if they ever decide to pile on the water bandwagon, their buying could drive the stock price sharply higher.
The real estate recovery should also drive earnings gains for Hovnanian (HOV). The homebuilder has shown up in long-shot screens this year as well, and if the housing market continues its long, slow recovery, the stock could rise substantially over the next few years. While the big funds love their competitors and own more than 80% of companies like Pulte Homes (PHM) and Toll Brothers (TOL), they own less than 50% of Hovnanian. If the company can deliver consistently positive results, that will change quickly, and the stock could move higher fast as they pile into the shares.
If I was Peter Lynch and bought what I used, I would own a lot of MGP Ingredients (MGPI). They make liquor and distill beverages like scotch, gin and vodka for craft distillers, including one of my all-time favorite American whiskies, Templeton Rye. They also make industrial alcohol for food and non-food use and produce specialty wheat proteins and starches. American premium whiskies like rye and bourbon are a growing segment of the spirits market today, and that should help MGP Ingredients grow at a decent rate in the years ahead. The big funds own less than 30% of the company, so when the stock finally hits their radar screen the buying pressure could be intense and move the stock much higher.
Finding a growth stock before it gets Wall Street's attention can lead to some huge gains and help build a winning portfolio for long term investors. It is not a pure value approach, but most younger investors should have this tool in the box.