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Oshkosh, Engility show value

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Tuesday, Feb. 4, 2014, 12:01 a.m.
 

Not all gentlemen prefer blondes. And not all investors prefer stocks that are going up.

But many do. For them, twice a year, I try to identify stocks that display both value and momentum.

With market indices showing a negative return so far this year, momentum is getting harder to find. And after a king-sized market advance last year, value is getting scarcer as well.

But it's still possible to find both. In this column, I will suggest four stocks that I think fit the bill.

Today's “value and momentum” list is the 24th in a series that began in 2000. Twelve-month returns can be calculated for 22 of those 24 columns.

On average, my “value plus momentum” choices have returned 20.06 percent per 12-month period, including reinvested dividends. On the same basis, the Standard & Poor's 500 Index has returned an average of 6.92 percent.

Eighteen of the 22 lists have been profitable. Fifteen of them have beaten the index.

The list from a year ago did well. It was up 33.64 percent including dividends, compared with 20.28 percent for the S&P 500 from Feb. 5, 2013, through Jan. 31.

That performance was driven by Western Digital Corp., a maker of disk drives, which returned more than 87 percent. I owned Western Digital for almost all my clients a year ago. Today, I still do, but have been reducing the size of my clients' holdings because the stock has gotten more expensive.

Oshkosh

Bear in mind that the results of my column recommendations are theoretical, with no allowance for trading costs or taxes. The performance of column picks shouldn't be confused with that of portfolios I manage for clients. And past performance doesn't predict future results.

Now, for the new selections. We'll lead off with Oshkosh Corp. (OSK), a stock I have owned in the past but don't own currently. Based in Oshkosh, Wis., the company makes aerial lift platforms, fire engines, garbage trucks, snowplowing vehicles and military-supply transport vehicles.

The problem for Oshkosh is that many of its customers are cities, counties, states and the federal government, all of which are on tight (and in some cases declining) budgets. Earnings have been uneven. The company is trying to reduce military revenue as a percent of the total and emphasize its civilian businesses.

I believe that states and municipalities will be improving their budgets during the next two to three years, allowing them to satisfy pent-up demand for fire engines, garbage trucks and the like.

The valuation ratios of 14 times earnings, 0.6 times revenue and 2 times book value (corporate net worth) put Oshkosh in the value range. As for momentum, the stock has moved up to $54 from $50 this year in a declining market.

Engility

Unlike Oshkosh, Engility Holdings Inc. (EGL) is not trying to reduce its dependence on federal contracts. As a consultant to various parts of the military, this Chantilly, Va., company is in bed with Uncle Sam and always will be.

Spun off from L-3 Communications in July 2012, Engility provides technical services, training, program management and engineering services to military and homeland-security customers. It has about 1,300 contracts, no one of which accounts for as much as 10 percent of revenue.

In an era of constrained military spending, Engility shares fetch a modest 8 times earnings and 0.5 times revenue. Those sorts of multiples attract me. I don't believe Congress will starve the military for funds, though it will stay stingy for a while.

Engility shares have advanced to $38 from $33 this year.

Nordion

Nordion Inc. (NDZ), from Ottawa, Ontario, Canada, makes radioactive isotopes used to diagnose and treat various types of cancer, and makes equipment to sterilize medical devices.

Its earnings history is very uneven, but the company has staying power. It has been around since 1946, and has debt equivalent to only 8 percent of stockholders' equity.

Nordion shares have risen to $9.56 from $8.54 this year on speculation about a takeover or restructuring. I think the speculation makes some sense, and also find the shares reasonably valued at 1.3 times book value (corporate net worth per share).

Allied Nevada

Finally, and most speculatively, I plump for Allied Nevada Gold Corp., which rose to $4.91 from $3.55 in January, a 38 percent pop. Because this is a penny stock (a term of art, denoting any stock that trades for less than $5 a share), it is prone to rapid and violent swings.

As with Nordion, I believe takeover speculators are helping to push the price. With Allied Nevada, I think a takeover is even more likely than it is with Nordion – though the only offer made public recently, from a little-known Chinese company, was quickly withdrawn. At 0.6 times book value, I view Allied Nevada as a worthwhile speculation.

John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at jdorfman@thunderstormcapital.com.

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