TRW, Mentor and Darling show value and momentum
Suppose you are choosing between two stocks, National Widget and Amalgamated Widget. The two companies look like twins when it comes to their balance sheets and profitability. Both have able leaders with good business plans. And both stocks sell for $15 a share. But one stock has descended from $20, while the other has risen from $10. Which would you choose?
The answer says a lot about your instincts as an investor. Many serious students of the stock market — William O'Neill, Ned Davis, Martin Zweig and Josef Lakonishok, to name a few — believe that positive momentum is a good thing for a stock to have.
My own view is that the two stocks are equally attractive. After all, the stock doesn't know where it has been. To be sure, there are studies showing that momentum tends to continue for a while. But I doubt the effect is strong enough to overcome the extra trading costs and taxes that often come with a momentum approach.
I'm aware that many investors prefer stocks that are on the rise. So about twice a year I write about stocks that I think have both value and momentum.
This is my 21st column on “Value Plus Momentum” stocks. Twelve-month results can be calculated for 19 of the previous columns (published in February 2000 through February 2011). The average one-year return has been 19.5 percent, compared with 5.2 percent for the Standard & Poor's 500 Index. Sixteen of the 19 lists were profitable and 13 beat the index.
My latest list, published in February 2012, is performing badly, but still has six months to redeem itself.
Now it's time for some new selections. Here are four stocks that I believe offer good value and have risen at least 20 percent year-to-date through Aug. 24, exceeding the S&P 500's 12 percent gain.
First, I recommend TRW Automotive Holdings Corp. (TRW), which makes car chassis, air bags and other auto parts. The car business is notoriously cyclical, but I believe we are in the early stages of a new up cycle.
Analysts expect TRW to notch about $5.87 a share in earnings this year, and the stock sells for just seven times that figure. Earnings are likely to rise in 2013, according to the analysts, and to rise further in 2014. So, even though TRW shares are up 28 percent this year, I think they can run a lot more.
Next, I plump for Mentor Graphics, a computer-aided-design (CAD) company based in Wilsonville, Ore. Financier Carl Icahn has made a $1.8 billion bid for the company. The stock, up 20 percent this year, sells for about $16.35 a share, giving it a market value right near Icahn's bid.
Mentor Graphics isn't merely a takeover play. After losing money in fiscal 2009 and 2010, it earned a profit of 26 cents a share in fiscal 2011 and improved to 74 cents in the latest fiscal year (which ended in January). For the year in progress, analysts expect $1.17, and for fiscal 2014 they predict $1.37.
Third, I like Darling International Inc. of Irving, Texas. The company collects used cooking oil, fat and inedible waste products from restaurants and food processors, then recycles it into other products. Long term, I think it benefits from the trend for people to eat more and more meals away from home.
Short term, the company just had its best year ever, earning $1.47 a share in 2011. Analysts don't expect earnings the next two years to match last year's figure. Nevertheless, seven of the nine analysts who follow Darling recommend it. I don't usually like to stand with the majority but in this case, I do.
Fourth, I offer a spectacular example of how rapidly investors' views of a stock can change. The example is Western Digital Corp. (WDC), which I own for clients and which is up 41 percent this year. Based in Irvine, Calif., the company is the world's second-largest manufacturer of computer disk drives.
Western Digital rose 33 percent in the first quarter, only to fall 26 percent in the second. It jumped 30 percent in July and rose 9.7 percent in the first 24 days of August. What investors treated as trash in the second quarter was gold in the first and third quarter.
The company is part of an oligopoly of only four significant disk-drive makers worldwide. It enjoys good profit margins, and makes a commodity that I believe will still be needed for years. At five times earnings, I believe it is a distinct value.
John Dorfman is chairman of Thunderstorm Capital LLC in Boston.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Police officer fatally shot in New Florence; suspect in custody
- Four downs: Steelers might still be Adams’ best bet
- Zatkoff’s, Malkin’s heroics not enough as Oilers down Penguins in shootout
- Steelers find success vs. NFC
- Steelers notebook: Brown downplays possible matchup against Seahawks’ Sherman
- Woman dies after bleeding on sidewalk outside Carrick pizzeria
- Central Catholic wins 5th WPIAL football title
- Offense continues to click as Panthers hold off Kent State, 85-76
- Thomas Jefferson uses defense, running game to capture WPIAL title
- As historic breakup nears, Alcoa works to redefine its ‘advantage’
- Aliquippa wins 16th WPIAL title, ends South Fayette’s 44-game winning streak