3 Stocks Better Than Their Prices

07/06/2012 11:30 am EST

Focus: STOCKS

Gregory Dorsey

Editor and Portfolio Contributor, The Leeb Group

In this kind of market, any disappointment can hammer a stock; even the expectation of disappointment can take a big toll and so it is for the trio below, which have big days ahead of them predicts Gregory Dorsey of The Complete Investor.

The slowing economy has been taking its toll on stocks, with the market in the mood to punish any company offering even a whiff of disappointment. Unfortunately, we’ve had our share.

You would think that given the struggling economy, pawn shops would be thriving. For EZCorp (EZPW), the nation’s largest pawn shop operator, store traffic continues to grow at a good rate, and revenues are climbing in the high teens. But with more people hocking household items than gold lately, margins have shrunk.

The stock also has been hurt by concerns about legislative efforts to rein in underwriters of payday and other high-rate, short-term loans, which represent 15% of the company’s income. We think those fears are overblown, however.

The company expects full-year profits of around $2.90 a share, meaning the stock is selling at less than eight times forward earnings despite prospects of growth of 15% or so in the next several years. EZCorp remains a buy.

Consulting group Huron (HURN) had a disappointing first quarter (it will report second-quarter results after we go to press). Revenues grew only marginally, while profits were well short of expectations.

The miss centered on Huron’s health care and education segment, which generates two-thirds of sales, and specifically on lower-than-anticipated revenues from contingent fees from its health-care business. Investors promptly bailed on the news.

But the consulting business is inherently hard to predict, so an occasional miss isn’t that surprising. Indeed, much of the missed revenue will likely come through in the year’s second half, while the number of hospitals using Huron’s services continues to grow. Management is particularly enthusiastic about its clinical services practice.

Huron’s health care-related consulting business should thrive as hospitals seek to cut costs by becoming more efficient and coordinating care. But the true bright spot for the company is its legal segment (30% of revenue), which has seen a sharp rise in its consultant utilization rate from a year ago.

The company is now guiding for 2012 profits of $2.25 to $2.50 a share. Taking the midpoint of that range, Huron is trading at a very reasonable 13 times forward earnings, with the potential for its profits to expand at a healthy rate. It remains a buy.

Finally, with the troops out of Iraq, the war in Afghanistan winding down, and Defense Department outlays expected to decline, investors are shunning defense contractor stocks these days. That includes AeroVironment (AVAV), even though the company is a leader in one area where spending is likely to remain strong—small unmanned aircraft, commonly known as drones.

AeroVironment also should benefit strongly from the adoption of remotely piloted drones by a variety of local law enforcement agencies and other civil organizations. It’s easy to understand the growing popularity of these unmanned aircraft, with their ability to canvas huge territories at a fraction of the operating cost of an airplane or helicopter.

And longer term, the company could get traction from its stake in electric cars, for which AeroVironment makes fast-charging systems. The electric vehicle market has been slow to ramp up. But once gasoline prices start to top $5, this business could provide a nice upside surprise to the company’s results.

The stock is trading at its lowest valuations on record in terms of sales, book value, earnings, and other benchmarks, despite expectations for continued strong profit growth. Our issue went to press shortly before the company released its fourth-quarter results, but taking a bird’s eye view, we would take advantage of the current weakness and buy.

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