If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
"Under the Radar"
09/23/2005 12:00 am EST
With a strategy developed under his mentor, the legendary Al Frank, Jamie Dlugosch has developed one of the most exciting and successful newsletters in recent years. Here's a look at his "Rational" approach, based on value and growth criteria.
"The yin and the yang of the market can have a hypnotic effect on its participants. Sometimes we can become distracted by the news of the day and lose focus on the fact that the market is made up of individual stocks. While everyone is looking at oil, the Fed, or housing, other individual stories are playing out on the sidelines. Exploiting these out-of-the-spotlight opportunities is a pillar of investing strategy.
"With attention elsewhere, 'Rational Investors' can fly under the radar to accumulate shares of undervalued positions. We wait patiently for our companies to build earnings momentum and then watch in gluttonous delight when traders discover our hidden gems. In a world of uncertainty, we can have confidence that such a drama will play out time and time again.
"I recently perused our model portfolio in search of under-the-radar value. As expected, many of our holdings fit the bill, but one stock stood out in particular: Sanderson Farms (SAFM NASDAQ). There has been little to talk about with SAFM for most of the year. The company has seen lackluster performance due to falling chicken prices and high grain costs.
"At the same time, its valuation has been quite compelling. The mixed signals to investors resulted in a $33-$48 trading range. The stock has made the round trip on this range twice in a span of 12 months. That should be compelling to both long- and short-term investors. But not much is being reported about the company and the stock appears to be forgotten.
"That's a mistake. SAFM is a screaming buy from both a technical and fundamental standpoint. Shares trade for just 74% of sales and eight times fiscal year (October) 2006 estimates of $4.41 per share. The company maintains a stellar balance sheet that shows close to $3 per share in cash, a current ratio approaching three, and little debt. As John Imerman, my director of research, said: ‘Gasoline won’t be the only thing consumers will be paying higher prices for in the wake of Hurricane Katrina.’
"I agree and with the company stating that the damage from the disaster would not have a material effect on long-term operations, we think SAFM is poised for a rally. For now, investors are neither paying attention nor recognizing the value in SAFM. The current market distractions should be used by Rational Investors as an opportunity to buy shares if you have not already done so. Our long-term target for SAFM is $80, and we would be buyers up to $40."
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