5 Small Stock Bargains with Upside

09/06/2011 1:30 pm EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

If you are selective and can tolerate near-term volatility, now is a good time to look for opportunities among small stocks, says Richard Moroney of Upside.

Has the rout in small stocks run its course? That is impossible to say, though valuations suggest many higher-quality names offer attractive rebound potential.

CVR Energy (CVI)
This company operates in two increasingly attractive markets—refined petroleum products and nitrogen fertilizers. The spread between the price of refined products and the price of crude oil has widened, and the company has seen margins and profits surge.

In the June quarter, CVR realized an average refining margin of $25.49 per barrel of crude oil, versus just $6.70 a year earlier. Higher prices for fertilizers also helped lift second-quarter earnings per share to $1.48, up from 22 cents—and 16 cents above the consensus.

CVR’s main facilities are near Cushing, Oklahoma—a major crude-oil trading and storage hub. Over the last five years, the company has spent more than $500 million to modernize and expand its production assets. Importantly, its improved refinery can be optimized to boost yields of higher-value fuels.

Rising analyst estimates call for per-share earnings of $4.17 for full-year 2011, up from 46 cents. Three months ago, the consensus was $2.54. CVR Energy is a Best Buy.

Darling International (DAR)
A provider of waste-recycling solutions to the food industry, Darling is being upgraded to Best Buy based on its strong operating momentum and reasonable valuation. June-quarter earnings per share surged to 44 cents, from 14 cents.

 Favorable pricing and contributions from acquisitions should drive continued growth. For 2011, the per-share profit estimate is $1.67, up from 63 cents last year. Darling, trading at a modest ten times estimated current-year earnings, is a Best Buy.

Complete Production Services (CPX)
This firm provides specialized production services to oil and natural-gas producers. Operating almost entirely in North America, the company is benefiting from a trend toward developing nontraditional sites, which typically require more sophisticated drilling techniques.

For 2011, consensus estimates project per-share earnings of $2.87, up from $1.08 in 2010. The consensus was $2.70 two months ago. For 2012, the consensus stands at $4.08, implying 42% growth.

At ten times estimated current-year earnings, the stock is cheap considering its profit-growth potential. Complete Production Services, capable of climbing 20% over the next 12 months, is a Buy.

Pan American Silver (PAAS)
The world’s second-largest primary silver producer is capitalizing on strong prices for precious metals. The company, which also produces gold, copper, and zinc, has seven mines in Mexico, Peru, Argentina, and Bolivia.

In the June quarter, Pan American produced 5.6 million ounces of silver and 21,900 ounces of gold. During the quarter, prices for silver more than doubled, and gold jumped 26% versus the year-earlier period.

Considering Pan American’s uneven earnings history, exposure to volatile metals prices, and potential for production disruptions, the stock has above-average risk. Still, based on the company’s operating momentum and the favorable pricing environment, shares appear undervalued at 11 times estimated 2011 per-share earnings of $2.99.

Last year, the company earned $1.05 per share. Pan American is a Buy.

WellCare Health Plans (WCG) provides managed-care services to about 2.4 million members, focusing exclusively on Medicaid and Medicare. The company is benefiting from an aging population and the trend toward shifting patient care to lower-cost settings.

WellCare cranks out a lot of cash flow, and a sizable cash position provides flexibility to pursue growth opportunities. Management plans to leverage its size and infrastructure to expand the company’s footprint and product mix.

While Medicare and Medicaid reimbursements could be targeted for cutbacks, WellCare is positioned for long-term growth. Moreover, the share price seems to discount potentially lower reimbursements.

At 12 times trailing earnings, shares trade 43% below their five-year average P/E. At less than ten times estimated current-year earnings, shares sell at a slight discount to their industry group. WellCare is a Buy.

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