3 Small Stocks with Big Futures

10/06/2011 9:15 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Historically, investors have done well buying stocks that have outperformed industry peers and the broad market, especially when company fundamentals and valuations are attractive, writes Richard Moroney of Upside.

Relative share-price strength is especially important when stocks are falling, as new leadership often emerges during down markets.

With that in mind, we screened for Upside recommendations that have outperformed the Russell 2000 Index since the recent downturn began July 7—and since the index hit a temporary bottom on August 8. We also insisted on the following:

  • Outstanding marks in both of our sector-specific scores, with scores of at least 95 for both our 12-Factor Sector score and our Reranked Overall score.
  • Broad-based strength in Quadrix, including Overall scores above 95 along with Momentum, Value, Earnings Estimates, and Performance scores above 65.
  • Industry-leading fundamentals, with no more than two industry rivals in the S&P 1500 Index earning better Quadrix Overall scores.
  • Superior share-price performance relative to industry peers based on year-to-date, six-month, and 12-month returns.

Reviewed below are the three stocks that passed our screens, all of which have solid year-ahead profit prospects and attractive capital-gains potential.

Alaska Air (ALK)
Has rallied 12% since August 8, versus a gain of 4% for the Russell 2000. The share-price strength partly reflects encouraging comments from rivals regarding near-term demand and bookings.

In addition, some US carriers are trimming flights and seat capacity, which is potentially favorable for pricing.

Alaska Air should deliver higher profits in 2011 (estimated 9% increase) and 2012 (11%), though fuel prices and consumer confidence represent potential wild cards.
For 2011, the per-share consensus stands at $7.78, up from $7.54 just a month ago. Alaska Air benefits from a solid balance sheet, with more cash per share and less debt relative to total capital than the average US airline. Buy.

Buckeye Technologies (BKI)
Shares are up 11% since small-cap stocks bottomed in early August. The company, a leading maker of specialty fibers and nonwoven materials, is benefiting from resilient selling prices and strong demand.

Buckeye’s sales are viewed as partly insulated from an economic downturn, reflecting the defensive nature of its end markets. The company’s products are used for food casings, filters, diapers, and paper goods.

Buckeye is expected to deliver 33% higher per-share profits in fiscal 2012 ending June, while revenue should increase 12%. Consensus expectations for average annual profit growth of 8% over the next five years seem conservative, particularly given recent operating momentum. Buy.

MasTec (MTZ)
The stock is up 10% since the Russell 2000 set a recent low, and seems capable of retesting its April high of $23.17 over the next year. The specialty construction contractor serves the utility, energy, and telecom industries.

A diversified customer base includes AT&T (T), DirectTV (DTV), and Duke Energy (DUK). MasTec is benefiting from an uptick in capital spending on natural gas and oil pipelines, and the company is seeing strong demand from wireless operators expanding their networks.

Consensus estimates project per-share profits will increase 24% this year, to $1.30. Sales are expected to climb 25% to $2.88 billion. MasTec has exceeded consensus profit estimates by at least 8% in the last four quarters.

At less than 14 times trailing earnings, the stock trades at a 12% discount to its five-year average P/E. Best Buy.

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