3 Little Names That Can in 2012

12/06/2011 8:30 am EST

Focus: STOCKS

Richard Moroney

Editor, Dow Theory Forecasts

With some good shopping and a little patience, you can still find good stocks for 2012, writes Richard Moroney of Upside.

Unprecedented volatility has pushed correlations on small-cap and mid-cap stocks well above historical norms, making it hard to swim upstream with individual stock picks. That’s the bad news.

The good news: High correlations indicate that company-specific strengths have been overshadowed by such big-picture worries as a possible recession and the debt crisis in Europe. So patient investors buying shares of well-positioned companies should ultimately be rewarded.

In your search for such stocks, you will want to consider small- and mid-cap names, if only for their sheer number.

On average, small- and mid-cap stocks are not particularly attractive relative to big stocks, which have cheaper average valuations and comparable growth rates. But roughly 3,400 of the nearly 4,400 US-traded stocks in our Quadrix universe have stock-market values below Upside’s typical cutoff of $3 billion, as do 320 of the 461 stocks with Overall scores of 90 or higher in Quadrix.

Amerco (UHAL)
This pick taps into two deeply rooted American tendencies: moving around and accumulating a lot of stuff.

Amerco is the parent company of U-Haul, well-known for its bright orange moving trucks and storage centers. And though Amerco has stepped into the insurance space, its core moving and storage business accounted for 90% of revenue and 99% of operating income in the six months ended September.

Even in the anemic recovery, Amerco’s sales have grown at least 10% year-to-year for six consecutive quarters, while operating cash flow has climbed at least 15% in eight of the last nine quarters.

The company plans to devote fewer resources to new construction than it has in recent years. That bodes well for free cash flow, which jumped in the September quarter because of a surge in cash flow and a dip in capital expenditures.

The stock trades at just seven times trailing earnings, well below its three-year average of nearly 18 and its five-year norm of nearly 19. If Amerco matches the single analyst profit estimate of $11.38 per share for the year ending March 2013—and the P/E returns to the one-year average of 11—the stock would reach $125 over the next 18 months.

Amerco is being upgraded to a Best Buy.

Neustar (NSR)
Spun off from Lockheed Martin (LMT) in 1999, Neustar operates the databases that help direct the routing of calls across North America’s carriers and networks.

In its early years, Neustar feared that new ten-digit telephone numbers would run out by 2008. Its solution changed the way phone companies dole out area codes.

Neustar completed its acquisition of Targus Information in November, a $650 million cash deal that could add 20 cents per share to 2012 earnings. The deal will also add debt to Neustar’s balance sheet, while a pending $250 million Dutch auction tender offer could reduce outstanding shares by 10% to 11%.

But Neustar’s strong free cash flow, exceeding $2.20 per share over the last 12 months, should allow the company to continue investing for growth.

Consensus estimates project Neustar will grow per-share earnings 18% and sales 22% in 2012, and estimates have drifted higher in the past two months. Shares trade at 15 times estimated 2012 earnings of $2.24 per share.

While a return to the five-year average trailing P/E of 21 seems unlikely, Neustar shares seem capable of reaching $40 over the next 12 months. Neustar is a Best Buy.

Primoris Services (PRIM)
One of the largest specialty contractors in the US, Primoris primarily operates in the southern states and Pacific Northwest. Major 2011 projects include the construction of a natural-gas pipeline from Wyoming to Oregon and highway construction for the Louisiana Department of Transportation.

The lumpy nature of such contracts and the tightening of government budgets present some risk to Primoris, especially in regard to highway-construction projects. But the company says most of its customers, including regulated utilities, are financially stable and should continue with their long-term projects. The backlog stands at $1.09 billion, up 22% from the end of December, and equal to its last three quarters of revenue.

September-quarter earnings per share more than doubled to 38 cents, easily topping the consensus of 20 cents. Revenue jumped 63% to $375 million, exceeding Wall Street’s forecast and marking the seventh straight quarter of at least 42% growth.

Per-share earnings are projected to increase 47% this year and be flat in 2012. But analyst estimates are rising, and shares appear cheap at 12 times trailing earnings—16% below its peer group. Primoris is a Best Buy.

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