'Inflection Point' picks stocks before they're hot
If you can find a company whose earnings are accelerating, before the stock becomes popular, you are ahead of the game.
I call these “Inflection Point” stocks.
Here are five companies that in my judgment meet that description, and are worth considering as investments.
Anthem Inc. (ANTM), one of the largest U.S. health insurers, should get a large boost from the new tax law. Unlike many companies, it has been paying more than 30 percent of its profits in taxes most years.
Anthem is based in Indianapolis, Ind. Among its business units are Blue Cross and Blue Shield plans in more than a dozen states. It reported just over $12 a share in earnings for 2017 and analysts predict more than $15 a share this year.
The stock isn't overly popular. Of 21 analysts who follow the stock, 12 recommend it. Shares go for 0.7 times revenue, an attractive ratio.
Canadian National Railway Co. (CNI) carries grain, coal and other commodities across Canada (about two-thirds of revenue) and the U.S. (about one-third).
Growth has been subdued in the past (about 5 percent a year), and the company has enjoyed a strong reputation for reliability. Lately, traffic has accelerated, which is helping earnings but hurting the railroad's long-time reputation for on-time performance, as it suffers from some traffic jams and delays.
I expect Canadian National to straighten out those kinks. While only 11 out of 31 analysts give the stock a “buy” rating, I think there is room for a positive surprise.
Newell Brands Inc. (NWL), formerly called Newell Rubbermaid, has a cornucopia of well-known consumer brands.
Among them are Bicycle playing cards, Coleman camping gear, Dymo and Sharpie office supplies, Goody hair products, Graco baby seats, Jostens jewelry, Mr. Coffee coffee makers, Oster and Sunbeam appliances, Rubbermaid housewares, and Yankee candles.
Analysts think the recent upturn in earnings is a flash in the pan. Of 16 ratings, only five are “buys.” But the stock is so cheap that I think it's appealing. Shares sell for only 11 times earnings, less than 1.0 times revenue, and less than book value (corporate net worth per share).
If you're like me, you probably associate J.M. Smucker Co. (SJM) with jam (I've bought and eaten a lot of it over the years). Today, however, jam is less important to Smucker than two other products – coffee and pet food.
Smucker produces Folgers coffee, and also supplies java to both Dunkin' Donuts and Keurig. It got into pet foods by acquiring the Big Heart brand in 2015.
In the food sphere, those well-known jams are joined by Jif peanut butter, Pillsbury flour, Crisco shortening, and others.
This year, Smucker's profits they should be above $8 a share, compared to $5.38 in 2015.
Based in Gladstone, N.J., Peapack-Gladstone Financial Corp. (PGC) provides bank and trust services to individuals and businesses in central New Jersey. Mortgage loans for apartment houses are one of its specialties; it also does a good deal of other business lending.
The bank was founded in 1921, so it will observe its 100th birthday in three years. Revenue and earnings have grown consistently in recent years, and accelerated in the past year. It is still a small-capitalization stock, with a market value of about $632 million.
This is the third column I've written on stocks reaching an Inflection Point.
So far, my Inflection Point picks have averaged a 15 percent return over 12 months, trailing behind the Standard & Poor's 500 Index, which posted a 20.4 percent average return. My selections have been profitable both times, but have yet to beat the index (the first year was a tie).
Last year's picks managed only a 7.9 percent return, versus 18.5 percent for the index. Investors Title Co. (ITIC), Gannett Co. (GCI) and AllianceBernstein Holding LP (AB) all scored gains ranging from 25 percent to 44 percent. But a huge loss of 49 percent in American Outdoor Brands Corp. (AOBC) doomed my results. A smaller loss of 13 percent in CVS Corp. also detracted.
Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.
With all of the companies mentioned today, there are risks. Perhaps their recent earnings acceleration will be temporary, not lasting. Perhaps they will never get the market recognition I feel they deserve. But on the whole, they look like good bets to me.
Disclosure: I currently own none of the securities discussed in today's column, personally or for clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at firstname.lastname@example.org.