Upside's Eight

01/21/2005 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Last week, we looked at Fred Hager, the top performing newsletter in the annual rankings of The Hulbert Financial Digest. This week, we look at some other top performers, starting with Upside , which certainly lived up to its name, coming in second in the annual ratings.

"In searching for 2005 capital-gains favorites, we look for high-potential stocks using our Quadrix stock-rating system. History suggests stocks with certain attributes, such as low price/earnings ratios, positive free cash flow, and share-price momentum, tend to outperform. By integrating more than 100 such factors into an overall score, Quadrix identifies stocks likely to deliver superior returns in most market environments. We then investigate these companies rigorously, examine future prospects, and assess valuations, as we want to be sure that the bright picture painted by Quadrix and other indicators are not already reflected in a stock’s price. Finally, we look for a catalyst, asking whether there is something capable of driving a stock higher over the next 12 months. Here, we review eight Best Buys with outstanding year-ahead potential.

"Asta Funding (ASFI NASDAQ) buys portfolios of charged-off consumer debt at considerable discounts to face value, then outsources the debt-collection work to collection agencies and law firms. Asta is benefiting from increasing levels of consumer debt, which surpassed $2 trillion in 2003. In fiscal 2004 ended September, per-share earnings increased 39% to $1.57 and revenue jumped 47% to $51 million. For fiscal 2005, consensus estimates project per-share profits will climb 18% to $1.86. At 15 times that estimate, the stock trades at the high end of its five-year valuation range but at a discount to peers. Asta is being upgraded to a Best Buy.

"Cal Dive International (CDIS NASDAQ), an energy-services company operating primarily in the Gulf of Mexico, provides construction and maintenance services to oil and natural-gas companies. High oil and gas prices have lifted demand, and repair work related to Hurricane Ivan should boost construction activity in the near term. For 2004, per-share profits are expected to more than double to $2.01. On Dec. 22, the company provided per-share profit guidance for 2005 of $2.00 to $2.70. The consensus estimate is $2.45. Based on its strong operating momentum, Cal Dive should beat expectations if oil prices stabilize above $40 per barrel. The stock is a Best Buy.

"Gehl (GEHL NASDAQ), a manufacturer and distributor of agricultural and light construction equipment, posted outstanding results in the first nine months of 2004. Gehl is rebounding from a cyclical downturn that began in 1999. Demand for both construction and agricultural equipment is improving, and Gehl says its order backlog remains ‘robust.’ September-quarter sales jumped 45%, while per-share earnings reached $0.57, compared to a loss in the year-earlier quarter. The one Wall Street analyst following the company expects per-share earnings of $2.50 in 2005, up 19%. Gehl, trading at ten times that estimate, is a Best Buy.

"Griffon (GFF NYSE) operates four divisions: garage doors, installation services, electronic communications, and specialty plastic films. Sales grew at all four segments in fiscal 2004 ended September. Per-share earnings for the year increased 34% to $1.71. Griffon continues to win government contracts for surveillance equipment, and demand for its electronic-communications products should remain strong over the next year. Griffon bought back 1.3 million shares last year and authorized the repurchase of another 1.9 million. Consensus estimates project per-share profit growth of 9% for fiscal 2005. Considering Griffon’s track record and outlook, the stock has further upside potential. Griffon is a Best Buy.

"OMI (OMM NYSE), a major oil-tanker operator, expects charter rates to increase in 2005 as the tight supply of tankers becomes exacerbated later in the year. Nearly 100% of the global tanker fleet is currently operating, and 6% of all ships are scheduled to be scrapped by April under new regulations that ban the use of single-hulled tankers for shipping oil. OMI owns 42 vessels and has ten more under construction. The average age of OMI’s fleet is three years, compared to the industry average of more than ten years. The stock, at seven times expected 2005 earnings, trades toward the low end of its five-year valuation range and at a discount to its peers. OMI, an active repurchaser of its shares over the past year, is rated Best Buy.

"Rofin-Sinar Technologies (RSTI NASDAQ), a maker of laser products used for cutting, welding, and marking a variety of materials, is benefiting from improvement in the manufacturing sector. Demand from European machine-tooling companies and Asian semiconductor companies is increasing. Sales to medical-device companies have also helped fueled growth. For fiscal 2004 ended September, per-share earnings jumped 75% to $2.26 and revenue increased 25% to $323 million. The company expects fiscal 2005 revenue of $270 million to $280 million. At 16 times expected fiscal 2005 per-share earnings of $2.65, the stock trades at a discount to its peers. The stock is a Best Buy.

"Synnex (SNX NYSE), North America’s third-largest distributor of information-technology products, sells more than 15,000 products from more than 100 vendors to 15,000 resellers. The company, with trailing 12-month sales of $5 billion, was founded in 1980 but became publicly traded in November 2003. The company has also moved many operations to China, where labor is cheaper, and located distribution warehouses close to customers. Cost advantages have helped Synnex compete on price and achieve superior operating margins. In September Synnex paid $40 million for EMJ Data Systems, which has vendor relationships with Apple. At 14 times expected 2005 per-share earnings of $1.62, the stock trades at a discount to its peers. Synnex is being upgraded to Best Buy.

"United Fire & Casualty (UFCS NASDAQ), a provider of property and casualty and life insurance, has benefited from rate increases. United Fire is selective about writing new business, emphasizing profitability over growth. More than 1,000 independent agents represent the company, primarily in the Midwest, West, and South. The company focuses on regions where it understands the market well and can respond to changes quickly. The two Wall Street analysts following the company expect profits to fall in 2005, but United Fire seems likely to exceed the consensus estimate of $3.28 per share. At ten times the consensus estimate, the stock trades below its five-year average p/e ratio of 13. United Fire, which split 2-for-1 on Dec. 15, raised its quarterly dividend 20% to $0.12 per share. The stock is a Best Buy."

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