After a delightful weekend watching football and eating far too much food, I spent some time this morning with the online edition of Value Line. One of the top-performing screens of the past 15 years has been stocks that trade below $10 and that have Value Line ranks of 1 or 2.
These stocks are usually emerging-growth stocks, or companies that have fallen out of favor and a turnaround is in progress. It is a really volatile screen with many draw-downs, but investors with fortitude can earn huge long-term returns with this approach to picking stocks.
The new online Value Line stock screen shows results from both the regular and small-cap editions of the research service. As a subscriber to the regular service, I can't see the commentary and statistics from the small-cap service, but I do get to see the stock names and tickers.
Looking at the full list of qualifying stocks, one observation jumps out at me. Small-bank stocks are seeing the type of fundamental improvement and price strength that earn them high ranks in terms of year-ahead performance. The trade of the decade should have another strong year in 2016.
There are some really interesting companies on the current list. Green Brick Partners (GRBK) is a homebuilder with operation in Texas and Georgia. The company started in life as BioFuel Energy Corp. and owned ethanol plants. Those were sold in 2014 and the company was a shell until buying JBGL, a builder, in 2014.
Green Brick controls four builders in Texas and one in the Atlanta region. The company buys the land and finances the sale of lots to its controlled builders. It then shares in 50% of the controlled builders' profits. The stock got hit hard in recent months as the company lowered guidance because of cold weather, new community development, labor shortages and an extended building cycle pushing back closings in its core markets.
David Einhorn's Greenlight Fund owns 49% of the company and Daniel Loeb's Third Point fund owns a little over 16%. Both are long-term owners and I doubt the notion of selling based on a weak quarter or two even crossed their minds. The company operates in attractive markets. I believe this stock could be a huge winner if the residential housing market experiences the type of long, slow recovery I expect.
Chegg (CHGG) is an interesting company that makes our low-price, high-rank list of stocks. This company rents and sells print textbooks, provides e-textbooks, supplemental materials, online tutors and internships as well as college admission and scholarship services. Chegg is growing nicely as it helps students gain access to books and study materials more cheaply than buying the books outright.
The company had more than 2 million users last quarter and the renewal rate on paid users is 79% as the rental idea gains momentum across the country. The valuation is high, but so are the growth estimates and expectations. If the company continues to grow revenues and earnings, it is easy to see this stock becoming a momentum favorite and escaping single-digit pricing.
Cambium Learning (ABCD) is another education-focused company that makes the grade as a low-price, highly ranked stock. This company makes educational products for all ages and has four divisions. Learning A to Z delivers teaching products for reading, writing and science. Reflex is a game process that helps with math skills. Kurzweil makes text-to-speech software that helps to develop reading skill and Voyager Sopris Learning helps develop evidence-based curriculum and teaching programs.
Cambium sells primarily to the public school systems across the United Sates, but it also services charter schools and home schools. The company is in the process of refocusing to concentrate more on higher-margin, technology-based learning solutions. If it is successful, this is another education company that could be a future market darling.
The low-priced, high-rank Value Line system is not for everybody. It is an aggressive approach to the markets. The list is composed of emerging-growth companies, corporate turnarounds like Stealth Gas (GASS) and JAKKS Pacific (JAKK) and a healthy dose of community bank stocks. Your portfolio definitely will not fit in anyone's style box, but it has delivered a roller-coaster ride to market-beating returns.
