Upside: Stick with Success

10/22/2004 12:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

"Nothing succeeds like success," says Richard Moroney, editor of Upside , an exceptional service focused on small cap, high growth stocks. "Everybody loves a winner, and nowhere is that truer than Wall Street — one of the few places where higher prices tend to boost demand."

"Since 1990, buying a diversified basket of stocks that have outperformed over the past six and 12 months has been a winning, though volatile, strategy. Even when share price momentum is working on average, many high-fliers see their stocks crushed. To keep the odds in your favor, don’t chase stocks based purely on share-price momentum. Instead, look for confirmation from fundamental factors. Check if earnings-estimate trends and operating results are corroborating the stock’s price action, and make sure the stock’s valuation leaves room for further advancement. Below are several high-quality, reasonably valued stocks that have displayed superior relative strength over the past three, six, and 12 months.

"Amerigroup (AGP NYSE) , a provider of managed health-care services to Medicaid recipients. Per-share earnings have surprised on the upside the last two quarters, with the June period marking the 25th consecutive quarter of profitability. Consensus estimates have edged higher over the past month — to $3.22 for 2004 and $3.64 for 2005 — projecting per share profit growth of 9% in 2004 and 13% in 2005. At 17 times expected 2004 per-share earnings of $3.22, the stock is reasonably valued given its growth prospects. The stock is a Buy.

"Brady (BRC NYSE), a leading maker of high-performance and specialty identification systems used mainly for printing signs and labels, is benefiting from improving sales demand. Acquisitions should help sustain growth. July-quarter sales rose 28%. Excluding one time items, per-share earnings rose 68%. Per-share earnings should climb 10% to 15% in fiscal 2005. At 19 times the consensus fiscal 2005 per-share earnings estimate of $2.53, the stock remains attractively valued versus its five-year valuation range. Brady, which recently increased its quarterly dividend by 4.8% to $0.22 per share, is a Buy.

"Improving market conditions have benefited Investors Financial Services (IFIN NASDAQ), a provider of custody, transfer agency, and administrative services for mutual funds, investment advisors, banks, and insurance companies. In the March and June quarters, the company added $19 billion in assets, bringing total assets under administration to $1.2 trillion. Consensus estimates project per-share earnings of $2.45 for 2005, up from $2.36 three months ago. Profit growth is expected at 38% this year and nearly 20% next year. At 21 times expected 2004 earnings, the stock trades toward the low end of its five-year valuation range.The stock is a Best Buy.

"Mine Safety Appliances (MSA NYSE) is a leading maker of safety equipment for fire fighting, homeland security, construction, and the military. Results are benefiting from strong sales of self-contained breathing apparatus and thermal imaging cameras to fire departments, and combat helmets to the military. Increased government funding for first responders and homeland security, a strong order backlog, and product introductions should sustain growth. Retail customers are becoming increasingly important, with half ofHome Depot stores now carrying Mine Safety’s products. Over the last three months, consensus per-share profit estimates have increased 13% to $1.92 for 2004 and 17% to $2.22 for 2005. At 20 times expected 2004 per-share earnings of $1.91, the stock is attractively valued given its growth prospects. Mine Safety is a Buy.

"Oil tanker company OMI (OMM NYSE), which currently operates 36 vessels, most of them double-hulled ships, is benefiting from regulations restricting single-hulled tankers. The company sold about 11 million common shares in June, with proceeds slated to help buy 14 vessels for about $725 million. The new ships should give OMI one of the industry’s youngest fleets. Despite a slight retreat after the stock offering, the stock has shown superior relative strength over the past four and 12 weeks. Consensus estimates for 2004 per-share earnings estimates have risen over the past two months to $2.14, translating into expected profit growth of nearly 69%. At seven times expected 2004 per-share earnings of $2.14, the stock trades toward the low end of its five-year valuation range and at a discount to its peers.The stock is a Best Buy.

"R&G Financial (RGF NYSE), the second-largest originator of mortgages on single-family residences in Puerto Rico, is benefiting from growing loan demand in its primary markets of Puerto Rico and Florida. Despite a changing interest-rate environment, Puerto Rico is experiencing a home construction boom, and the housing market in Florida remains solid. The company maintains a low credit-risk lending profile. Consensus earnings estimates for 2004 and 2005 have risen sharply over the last year, with projected growth rates at 28% for this year and 14% for next year. The stock has steadily outperformed the market for the last 12 months. At 13 times expected 2004 per-share earnings of $2.87, the stock trades at a slight discount to its peers.R&G remains a Best Buy.

"StanCorp Financial Group (SFG NYSE) provides employee-benefit products, including group and individual disability insurance, retirement products, and group life and dental insurance. Management expects premium growth to continue into 2005 as job growth improves. Favorable claims trends drove a 33% per-share earnings surprise in the June quarter. In the last two months, consensus per-share earnings estimates have risen 8% to $5.93 for 2004 and 2% to $6.29 for 2005, translating into projected growth of 16% this year and 6% next year. At 12 times expected 2004 per share earnings, the stock trades at a discount to its peers. The stock is a Buy.

"United Fire & Casualty (UFCS NASDAQ) is benefiting from strong insurance underwriting trends, with lower claims frequency and price increases boosting results. September quarter results will be hurt by hurricane claims, but the company has maintained strong reserves. Per-share earnings have exceeded consensus estimates by 35% or more in each of the last four quarters. The two analysts following the stock expect per-share earnings of $6.00 to $6.15 for 2004 and $6.20 to $6.35 for 2005. At less than 10 times expected 2004 per-share earnings, the stock trades in line with its five-year valuation range and at a discount to its peers. The stock is a Best Buy."

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