John Reese, editor of Validea, selects stocks based on the investing strategies of well-known, top-performing advisors; AeroVironment (AVAV) has been added to the portfolio based on the small-cap growth strategy of the Motley Fool.
AeroVironment designs, develops, produces, supports and operates a portfolio of products and services for government agencies, businesses and consumers.
The company operates through the Unmanned Aircraft Systems (UAS) segment, which focuses primarily on the design, development, production, support and operation of UAS and tactical missile systems that provide situational awareness, multi-band communications, force protection and other mission effects.
It supplies UAS, tactical missile systems and related services primarily to organizations within the United States Department of Defense (DoD). The company's small UAS products include Raven, Wasp AE, Puma AE and Shrike. The company also offers the Qube, an UAS for law enforcement, search and rescue and fire department personnel.
The Motley Fool small cap growth methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. AVAV's profit margin of 17.17% passes this test.
The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. AVAV, with a relative strength of 94, satisfies this test.
A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. AVAV's free cash flow of $2.50 per share passes this test.
AVAV's profit margin has been consistent or even increasing over the past three years, passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
Most importantly, good operations generate cash. The stock's trailing twelve-month Debt/Equity ratio of zero is at a great level according to this methodology because superior companies don't need to borrow money in order to grow.
