Upside Kickers

04/23/2004 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

"For the most part, we limit our Buy List to stocks with sales and earnings momentum, attractive relative valuations," says Richard Moroney, editor of Upside. "But there are other potential upside catalysts. Here are some such stocks with kickers."

"Historically, dividend initiations have been bullish developments. To uncover potential first-time dividend payers, we look for companies generating healthy free cash flow. In addition, we screen for companies with plenty of cash on their balance sheet. One company that made this cut is Barnes & Noble (BKS NYSE), which has 647 stores in 49 states. Its free cash flow has trended higher, reflecting solid earnings growth and improvements in working capital. Sales benefited from strong demand for bestsellers and DVDs. Steady cash flow, coupled with a healthy cash position of $6.30 per share, provides ample room for a dividend. The stock is a buy.

"In general, rapid dividend growth indicates that management has faith that earnings and cash-flow trends are sustainable. In February, Flagstar Bancorp (FBC NYSE) announced a 67% dividend increase, boosting the quarterly per-share payout to $0.25. The stock ranks among the top 6% of all US companies for three-year dividend growth. The potential for better-than-expected 2004 earnings qualifies the stock as a top pick among mortgage lenders. At roughly ten times the consensus estimate, the stock seems unduly cheap. "

"Short sellers attempt to profit by selling stock at a higher price and later repurchasing it at a lower price. To find short-squeeze plays, we consider a stock's short interest (the number of shares sold short), short ratio (short interest divided by average daily trading volume), and float. One stock to watch is Investors Financial (IFIN NASDAQ), which has about 8.3 million shares sold short, which represent roughly 13% of its float. The short ratio, an estimate of the number of days needed to buy back all shorted shares, is 13. Improvements in the stock market and market-share gains have fueled robust earnings growth. The stock has our best buy rating.

"You should not buy a stock solely for a stock split, as it has no impact on the value of your holdings. But studies suggest there is a measurable, though often fleeting, lift in the performance of stocks that split. To uncover split candidates, we looked for stocks trading near or above the price at which they last split. One candidate is United Fire & Casualty (UFCS NASDAQ). The last two times the company split its shares, the stock was trading around $42. Both were 3-for-2 splits. United is well positioned for growth. Despite a 42% gain over the past year, the shares trade at just ten times expected earnings. The stock is rated a best buy."

"Moving averages are one of the most popular tools of technical analysis. A stock that is in favor and displaying relative strength will typically have rising 50-day and 200-day moving averages. MoreoverOne standout technical performer is Finish Line (FINL NASDAQ). Impressive sales and profit growth have sparked a rally in Finish Line. February-quarter sales jumped 30%, fueled by 19% same-store sales growth. For the fiscal year ended Feb., earnings more than doubled to $1.93. Management increased its per-share earnings guidance for fiscal 2005 to a range of $2.29 to $2.33. The stock is a best buy."

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