Top Picks 2017: Westinghouse Air Brake

01/19/2017 6:00 am EST


John Reese

Founder and CEO, And Validea Capital Management

My Top Pick for conservative investors for 2017 is involved in the manufacturing of products for locomotives, freight cars and passenger transit vehicles, notes John Reese, editor of Valida, a newsletter that selects stocks based on the criteria of legendary investors.

Westinghouse Air Brake Technologies Corporation (WAB) scores highly based on my Warren Buffett-based model, which is based on the book Buffettology, and also the Peter Lynch-inspired approach that uses the method outlined by Lynch in One Up on Wall Street.

The Buffett approach looks for firms with a consistent long term track record of earnings and high levels of profitability, both of which help indicate a strong competitive moat around the underlying business.

Westinghouse Air Brake has delivered 21% annual earnings growth over the last 10 years and has produced a 17.9% return on equity and a 13.2% return on total capital over the last decade.

The firm – a mid-cap with a $7 billion market cap --also has a reasonable level of debt, positive free cash flow and has been buying back stock -- all positives my Buffett model likes.

Based on the model's analysis, the stock has the potential to deliver a 9% annual return to investors over the long haul.

The strategy I base on Peter Lynch's approach finds the stock attractive as well due to its reasonable valuation and growth rate.

Lynch was known for popularizing the PEG ratio, which is the price-to-earnings ratio dividend by the firm's growth rate. The lower the PEG ratio the better, and Lynch looked for stocks being valued at less than their growth rate.

As of this writing, the stock is more than 10% off its 52 week high. The potential for stronger growth and infrastructure spending in 2017 and 2018 should bode well for the stock.

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Editor Note: Last year, John Reese chose Lydall (LDL) as his Top Pick; the shares rose 74.3%. He now says, "At one point, Lydall scored highly based on multiple strategies but given the stock's strong run and valuation, the shares aren't as attractive based on my guru models as they were a year ago. 

"The shares still get high marks based on our Lynch model, but none of our other quantitative strategies score the stock above 70%. With a P/E ratio of 28, the shares look expensive relative to the market, although the firm does boast a much higher growth rate vs. the broader market."

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