The Best of Both Stock-Picking Worlds

02/22/2011 1:22 pm EST

Focus: STOCKS

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

These attractively valued stocks have earned top grades from two reliable and conservative rating systems, writes J. Royden Ward, editor of Cabot Benjamin Graham Value Letter.

Value Line has been around for 80 years. The Value Line Timeliness Rank measures probable price performance during the next 6 to 12 months relative to the other 1,700 stocks covered. Value Line’s top 100 ranked stocks have risen 26.7% per year during the past 23 years. Stocks with strong buy ratings have a tendency to be moderate risk.

Standard & Poor’s is the oldest and probably most comprehensive investment service for common stocks. The S&P rating system ranks stocks according to their total return potential compared to the S&P 500 index. Stocks rated “strong buy” tend to be conservative.

If I am searching for low-risk stocks, I look for those that have high Standard & Poor’s and Value Line Timeliness ratings. My matching program recently turned up eight such names.

My past experience with this methodology has shown that these eight stocks will perform very well, on average, during the next 6 to 12 months. Included in the list were stalwarts Hewlett-Packard (NYSE: HPQ) and Wal-Mart (NYSE: WMT). Also included were Avnet (NYSE: AVT), Metro PCS Communications (NYSE: PCS) and TRW Automotive (NYSE: TRW), which are a tad more risky than HPQ and WMT, but look more attractive to me and are described below.

In Technology’s Trenches
Avnet is a distributor of electronic components, enterprise computer and storage products and embedded subsystems. The company resells electronic components, computer products and software to more than 300 manufacturers, sometimes with assembly or other value added by Avnet.

To retailers, Avnet markets and sells mid- to high-end servers, data storage, software and the services required to implement these products and solutions.

Corporations are fueling demand for storage products and networking gear, as those companies upgrade their data centers to improve efficiency. Avnet’s recent purchase of Bell Microsystems will add substantial sales in 2011.

I expect 16% earnings per share growth during the next five years. At 9.3 times current earnings per share, AVT shares are a bargain. The company does not pay a dividend.

Flat Rate, Fat Profits
Metro PCS Communications is a wireless telecommunications provider. The company offers wireless broadband mobile services under the MetroPCS brand in selected metropolitan areas in the US over its own licensed networks or the networks of affiliates.

PCS provides a variety of wireless communications services to its subscribers without long-term contracts, but with paid-in-advance, flat-rate, unlimited usage plans that include all applicable taxes and regulatory fees in the monthly price. PCS’s unique plans are sold at a low monthly fee and are attracting many new customers at the expense of larger providers. The company has eight million subscribers.

Metro PCS’s aggressive marketing of flat-rate wireless plans with unlimited usage is winning new customers at a rapid rate. I forecast 24% earnings-per-share growth for the next five years or longer. At 17.2 times earnings, PCS shares are undervalued.

Buckle Your Seat Belts
TRW Automotive is a worldwide supplier of systems and components to automakers. Products include braking and steering systems, airbags and seat belts, and crash sensors.

TRW is aggressively expanding operations in Brazil and China to meet customer demand. Demand in the US is also picking up, and auto sales in Europe, where TRW has a large presence, should start to see improvement in the second half of 2011. I believe earnings per share will increase 19% per year during the next five years. At 10.4 times current earnings, TRW shares are a bargain.

[Ward’s Two Best Value Bets for 2011 have returned 14% and 23% so far this year—Editor.]

Subscribe to Cabot Benjamin Graham Value Letter here…

Related Articles on STOCKS