Undiscovered Country: 3 Unknown Growth Stocks to Watch

 | Jun 16, 2016 | 12:00 PM EDT
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twin

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nssc

The streak remains intact. Yesterday, as the Fed made its announcement and Janet Yellen appeared before the press, I snuck off and took a little midday nap. I do not even want to be in a position to act or overreact to anything the Fed may or may not do. Reading the decision, and Yellen's commentary later in the day, reiterated to me that Janet and her fellow Fed Governors have a terrible job, right now.

The economy just refuses to grow at a rate that will allow them to raise rates. I don't think that's going to change in a meaningful manner anytime soon. I have said for almost five years now that the economy is better than it was during the recession, but it is not really good yet.

Given that I am not going to trade or bet on possible Fed actions, I did spend some time last night looking for what I like to call undiscovered growth stocks. These are companies that are growing sales and earnings at a decent rate -- in spite of the slow-growth economy -- and are way off Wall Street's radar screen. I have done very well with these stocks over the years: If the growth is sustained, Wall Street eventually notices, and the subsequent buying pressure can take the shares higher pretty quickly.

When I ran my undiscovered growth-stock screen, I was happy to see that Daktronics (DAKT) still makes the grade. The company makes electronic display systems, like electronic billboards and huge displays for professional athletic stadiums. It can be a lumpy business, as the huge scoreboards and stadium displays are wildly profitable but they are not replaced very often. Wall Street hates lumpy: It sold the earnings decline late last year and have continued to sell the shares into 2016. 

Looking forward, this is a fantastic business. Digital signage for transportations systems, billboards and the sports market is going to be a growth market, and Daktronics is well positioned within the market. Growth rates should exceed the relatively low rates currently priced into the stock, and it has the potential to be a huge winner for patient investors. I own the stock and currently have a loss ,but I will be buying more and expect to sell this stock in four or five years for many times my cost basis.

Twin Disc (TWIN) manufactures and sells marine and heavy duty off-highway power transmission equipment worldwide. The weak economy means that not a lot of folks are spending money on boats, but as I have said many times in the past, boating is one of the those addictive lifestyles -- and eventually boaters will buy that new boat or upgrade their current craft. 

The company is also feeling some pain from a lack of spending for vessels in the energy industry, and investors have been avoiding the shares. There are some signs of improvement, as the six-month backlog increased from $34.6 million at the end of the second quarter to $39.9 million, and is now about $4.5 million higher than it was at the end of fiscal 2015. 

CEO John Batten addressed the energy markets on a recent conference call, saying "I do believe we are at or very close to the bottom, and that we should see growth in the second half of the year. Maybe closer towards the end of the calendar year." This may not be a spectacular growth company, but Twin Disc should see steady improvement in the years ahead, and that should reward patient long-term shareholders very nicely.

Napco Security Technologies (NSSC) is another boring little company that I think has a bright future. It makes locks, alarm, video surveillance systems and other access control and security systems. People are more concerned about their personal safety and security than ever before. Corporations and government agencies are also worried about the safety and security of their buildings and people.

Napco makes everything from simple dead bolts to biometric entry systems, and will get its share of this growing market. Institutions own less than 30% of the stock, and when they begin to recognize how strong spending on security and surveillance systems will be going forward, their buying of companies like Napco should lead to some very nice share appreciation.

Undiscovered growth stocks can lead to nice gains for patient aggressive investors. You have to have a longer time frame than the two or three months that is so popular today, but the gains should be in multiples of your cost -- and not just a few percentage points.

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