Dorman: Stellar Fundamentals

04/28/2014 8:00 am EST

Focus: STOCKS

John Reese

Founder and CEO, Validea.com And Validea Capital Management

To pick stocks for his buy list, John Reese analyzes the investment strategies of a "legendary" investor. Here, he reviews a new addition to the Hot List at Validea.

The fact that momentum stocks have gotten hit hard has made them—particularly the fundamentally sound high-momentum stocks that the Hot List targets—more attractive from a long-term perspective.

Take Dorman Products (DORM), which has a 12-month relative strength of 80 and is up about 15% since mid-January. The company is a supplier of automotive and heavy duty truck replacement parts and service line products.

Yes, it has good momentum, but it also has stellar fundamentals and financials—no long-term debt, a 4.7 current ratio, 22% return on equity, 17.8% return on retained earnings over the past decade, and 0.89 PEG.

In other words, this isn't a speculative, ride-the-wave stock; it's a strong company with good long-term prospects and reasonable valuation given its stellar growth history.

High-momentum stocks with those types of characteristics may get lumped in with more speculative, momentum-driven shares for short periods of time. But history shows that over the long-term, these fundamentally sound stocks should deliver very good results.

The stock scores well on our value investor model that is based on Benjamin Graham. According to this model, the investor must select companies of "adequate size." DORM's sales of $664.5 million, based on trailing 12 month sales, pass this test.

The current ratio must be greater than or equal to two. Companies that meet this criterion are typically financially secure and defensive. DORM's current ratio of 4.71 passes the test.

For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that meet this criterion display one of the attributes of a financially secure organization. The long-term debt for DORM is $0.0 million, while the net current assets are $340.7 million. DORM passes this test.

Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last five years.

Companies with this type of growth tend to be financially secure and have proven themselves over time. DORM's EPS growth over that period of 334.1% passes the EPS growth test.

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