Four for the Upside

03/04/2005 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Using a quantitative system, the "Best Buy" list from Upside has gained 318% since its May 1999 inception, vs. a 43% gain in the Russell 2000 index over the same period. Here, editor Richard Moroney looks at four new stocks that are "standouts" in their ratings system.

"By diversifying across industries, you can limit overall risk. Our four new buy recommendations, from four different industries, have carved out attractive niches. All four have solid fundamentals, attractive valuations, and impressive scores from our Quadrix rating system.

"Founded in 1947, The Andersons (ANDE NASDAQ) is built around four businesses. The agricultural division (69% of sales) operates grain elevators, fertilizer distribution terminals, and farm centers in Ohio, Michigan, Indiana, and Illinois and its processing business makes fertilizer for retailers and lawn-care companies. It smaller rail division repairs, sells, and leases railcars and locomotives, and its retail operations consist of six home-center stores in Ohio. Record-setting corn and soybean harvests in the Midwest have bolstered grain volumes, and the firm raised its 2004 profit guidance in December and again in January. Full-year earnings per share are expected to range from $2.50 to $2.60, implying at least 57% to 64% growth. The stock, with a Quadrix Overall Score of 95, is being initiated as a Buy.

"Selective Insurance (SIGI  NASDAQ) sells property and casualty insurance through roughly 800 independent agents in 20 Eastern and Midwestern states. Selective should benefit from improving underwriting results in its core commercial business. In addition, a diversified revenue stream and market-share gains bode well for near-term results. December-quarter earnings per share rose 79%. For 2005, operating per-share earnings are expected to climb 5% to $3.77. Trading at 12 times that estimate, the stock is attractively valued. Selective scores a 94 for Quadrix Overall, with a 99 Value score. The stock, yielding 1.8%, is being initiated as a Buy.

"Sonic Solutions (SNIC NASDAQ) a leading provider of DVD authoring systems, is positioned to deliver robust growth. Hollywood studios use its gear to create DVDs, while its consumer products allow users to convert home movies, photos, and music into DVDs. For fiscal 2005 ending March, per share profits are expected to jump 61% to $0.74. For fiscal 2006, estimates range from $1.25 to $1.47. Sonic is an aggressive holding given its fairly narrow product line in a fiercely competitive sector. Still, strong sales and cash-flow momentum should support the stock, and the shares seem cheap on a cash-adjusted basis. The p/e is 18 based on expected year-ahead earnings. Subtracting Sonic’s nearly $3 per share in cash, the adjusted forward p/e is 15. Sonic is being initiated with a Buy rating.

"United Industrial (UIC NYSE) makes unmanned military aircraft and aviation test and simulation systems, as well as energy systems. The defense unit generates more than 90% of sales and pretax profits. United Industrial should benefit from the military’s increased use of unmanned planes for battlefield information. In January, the company was awarded a $72 million contract to supply the Army with remote-controlled planes. Per-share earnings for 2004 should approach $2.16, up 58%. For 2005, the lone profit estimate is $2.26 per share. At 15 times expected 2005 earnings, the shares seem reasonably valued given the firm’s attractive market position and operating momentum. United Industrial, which is considering selling its energy unit, is being initiated as a Buy."

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