UnDiscovered Stocks: Under the Radar

10/31/2003 12:00 am EST

Focus:

Nancy Zambell

Editor, Wall Street's Best Investments and Wall Street's Best Dividend Stocks

Nancy Zambell takes the highly complex nature of financial analysis and cut it to its core–focusing on just a few relatively simple but important investment factors. She avoids those stocks that are widely followed by Wall Street analysts. Rather, her service, UnDiscovered Stocks,seeks those issues that have yet to appear on Wall Street’s radar screens.

"After my years in this business, I probably have analyzed some 400 to 500 stocks, and I’ve really found that you don’t need a rocket science model to investigate and analyze stocks. You don’t need 200 parameters. Sure, you can build models with 200 parameters, 500 parameters, even 1000. But you’re not going to do any better than by following five or 10 factors. That’s exactly the truth. And today, I want to talk about those few concepts that are most important when analyzing a stock. Yes, it will take work, but the internet is an excellent tool, and what used to take me a week to research now takes two hours. The following five points are the main factors I believe investors should consider when buying a stock:

1. The first thing I like to do is to find companies that are undiscovered by Wall Street and by the major institutional investors. So the first thing you can do is to eliminate your holdings in stocks that have many analysts following them, and high institutional holdings. The criteria we seek in the companies that we will consider buying is less than ten major brokerage analysts following the stock. In addition, we only want a stock that has less than 40% institutional holdings.

2. Look for companies whose sales and earnings are growing. We will also only buy a stock with a reasonable P/E based on their industry as well as their own historical P/E averages. Typically growth in earnings is what drives the price of a stock. I like to find companies that are growing their earnings and sales in tandem.

3. Look for companies with reasonable debt levels based on their industry as well as their own historical averages. Just use common sense. Too much debt is too much debt!

4. Look for companies with good cash flow. The number you want is on each company’s cash flow statement and the number you need to look for is cash flow from operations. That needs to be a positive number. Just be careful if you are looking at a cyclical company.

5. Find out what the insiders of the company are doing: how much they are buying, selling, how much do they have left, and what is the historical pattern of buying and selling. I did a little research on the best and worst insider stocks right now, based on insider buying. Among current insider buying situations is Suffolk Bancorp (SUBK NASDAQ), which is obviously a bank. You see a lot of insider buying and selling in banks now. This one is in Long Island. Its 52-week high is near 37. Another is  Community Bank (CMBC NASDFAQ), which is a San Diego bank. It is trading around $20, again close to its 52-week high. Not all the time, but lots of times, insider buying in banks is a prelude to the banks being bought. I’ve done really well over time in small regional banks, particularly where you see the founding family still running the bank, with high levels of insider ownership. Oftentimes they get bought out. Outside of the banking sector is Terex (TEX NYSE), which is an equipment manufacturer for construction infrastructure and the surface mining industry. It’s trading now around 21, which is also close to its 52-week high.

"We’d also note that the stocks that have had the most insider selling recently are telecom/tech stocks: Gric Communications (GRIC NASDAQ), which provides remote Internet access and mobile broadband services, DSL Net (DSLN NASDAQ), which obviously deals in DSL service, and Silicon Labs (SLAB NASDAQ) which develops integrated circuits for the communications industry.

"Meanwhile, here are several stocks I like right now. Don’t just go rush out and buy these. Do a little research. Make sure they are right for you. But these are stocks that I like now that you should take a look at.

"Acres Gaming (AGAM NASDAQ) makes electronic equipment and software for the casino gaming industry. This has become a booming industry as the technology has become more and more complex. It has a dividend of 1.9%. For the fiscal year ending June, revenues were up 78% and net income went from $3.9 million to $17.1 million. So things are turning around. The stock is around 11½, now near its 52-week high.

"Closure Medical (CLSR NASDAQ) makes tissue adhesive products for wound care and closure. They are also the professional healthcare and in the veterinary markets. It's at $29.60 a share, which is at its 52-week high. For the six months ending June, revenues are up 51% and net income is up 99%.

"SM&A (WINS NASDAQ) is trading at $13.52, again close to its 52-week high of $15.59. This is a company that does strategic consulting and proposal management. The company reported sales up 43% and net income went up 2.5-fold in the six months ended June.

"Navigators Group (NAVG NASDAQ) is an insurance company, involved in the property and casualty sector. For the six months ended June 30, revenues were up 41% and income was up 54%. The stock is now at $29.99, close to its 52-week high.

"Cash America (PWN NYSE) operates pawn shops. It does a lot of loans. For the six months ended June, revenues were up 4% but net income rose 58% due to some really major cost controls. The company is trading at $17.56, which is also close to its 52-week high.

"SFBC International (SFCC NASDAQ) is a company that provides pharmaceutical and biotech companies with specialized development services during phase one and two clinical trials. 69%, net income 49%."

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