Every once in a while we come across an investing strategy that gives a moment of pause. For me, that moment came with meeting Bob Auer, Senior Portfolio Manager of the AUER Growth Fund (AUERX) who has stayed true to a remarkably simple and aggressive investment strategy.
Can You Explain the Strategy?
"We don't pick stocks," cites the AUER website, "but rather, stocks pick us since we purchase nearly every stock that meets our qualifications." So what tall order requirements have the fund set? Simply this:
Stocks must meet all of the following criteria:
- Profits up 25% year over year
- Sales up 20% year over year, for substantial sales and earnings growth
- Price/Earnings of 12 or under, and has decreased substantially over the prior twelve months.
The stocks must also meet a number of other metrics included in their proprietary screening process. Shares are sold when it has made a 100% return. The stocks are still eligible for the next round of investments.
In an interview with Kapitall, Auer explains, “We look at stocks with US ticker symbols 4 times per year, and we’re willing to take any one that meets our criteria. There are almost 8,000 companies when you take ETFs and REITS into account, although ETFs never make the cut."
Toggle between the 3 and 1-year time frames to see how AUREX has performed relative to the S&P 500 index.
Historic Ups and Downs
While the AUER Growth fund is just over three years old,the Auer strategy hasn't changed in over 20. It has outperformed the S&P 500 during all 10-year periods prior to inception (pre fund launch).
Interestingly, the fund (and therefore strategy) has taken a dive since inception. But Bob isn't worried "This has happened before," he says pointing to 1998 and 1999 when his strategy net -17.56% and 18.62% returns relative to the S&P’s 28.58% and 21.04% returns. “Look what happens next.” Touché. In the following three years while the S&P had negative returns, AUER grew by 26.78%, 52.05% and 15.67%. After that, 154.56%.
Clearly this strategy isn’t for the feint of heart.
Why This Strategy?
The strategy itself was born out of a revelation his father had when comparing two similar corner apothecaries in Indianapolis. One, Hook’s Drug Stores, grew at a 5% rate at 5 year compounded and was eventually bought out by CVS. The second is Eli Lilly (LLY), which grew at a 20% rate at 5 year compounded, and went on to mint millionaires. It is now worth over $61 billion.
The secret, his father had said, must be in the high growth rate: if sales are going up 20%, they must have economies of scale. It was the foundation for the strategy detailed above. It’s a discipline, Bob says, that ensures his fund is always investing in fast growing companies at “ridiculously low prices.”
Stock Picks: What are some undiscovered growth and value stocks that continually come up in your screens?
In the energy industry, there’s a tendency for stocks associated with fracking and natural gas to make it through. Here are some notable names:
For three quarters the firm has held shares of Basic Energy Services (BAS), which currently trades below $12 with a P/E of 5.85. The company own big trucks that can pump in chemicals at well sites. “It’s probably an EPA hazard,” adds Auer, “and we don’t know the overhang on that. People think a Romney win will decrease EPA influence and open up more drilling.”
Also in the energy space is Argan, Inc (AGX), a firm that converts coal fired electric plants to natural gas. “Both presidential candidates are pro natural gas. Utilities are also tired of regulations with coal and dirty energy sources. It costs Argan around $100 million to retrofit a plant, and they have all the engineers and knowledge to do it. The firm is winning big contracts, and it doesn’t hurt that Japan and Germany are phasing out atomic energy.”
In the Pharmaceutical industry, Auer finds Impax Laboratories (IPXL) of special interest. The $1.7 billion specialty pharmaceutical company makes generic drug products, and its pipeline looks juicy: “They just got first mover to a billion dollar drug Adderall. It’s driving sales and revenue growth. 7 of 42 products in their pipeline will be the lead generic on the market, and they started research to come out with their own branded products. Particularly, they’re in phase 3 for a Parkinson’s medication. The stock is regularly hitting 52-week high."
EDAC Technologies Corporation (EDAC). Auer talks passionately about this stock, and it truly is noteworthy. This small $68 million firm engages in complex sub assemblies. A brilliant staff of technicians works on large and specialized machines, connecting circuits with complex custom manufacturing on a production basis that is very intricate. “This isn’t something you can take over to China. The company has a backlog of two-and-a-half years of work.“
In commodities, Auer’s favorite gold stock is Primero Mining Corp (PPP). "You can buy it for less than Book Value (BV). If gold goes to 2.5k/ounce, why not buy it where you can buy it for less than a dollar?"
Press play to see changes in annual return for the stocks mentioned here:
Advice: What words of wisdom would you pass on to novice investors?
“The stock market is the greatest test of a person's patience of will. For most investors, they are their own worst enemy. They don't have to use our system but investors should have a discipline that they stick to, one that forces them into the market when they don't want to be there. If you want to grow wealth you should have a discipline you stick to through thick and thin. Above all, don't jump from thing to thing, otherwise you become a donor.”
A donor? He explains: “There are three groups of people: speculators, – and they perform a service by rolling the dice and adding liquidity. Then there are true investors, like Warren Buffett, who have a system they stick to through thick and thin. Lastly, there are donators. They don't have a system. They underpay and overget, they keep donating to the market. Hopefully they have good 40 hour per week jobs.
Interested in mimicking the strategy of Auer? In truth, anyone can mimic it by using the rules mentioned above. For those interested in what names have already made the cut, we list the 10 stocks that currently hold top rank in the AUER Growth Fund (AUERX) portfolio.
Use this list as a starting point for your own analysis.
1. C&J Energy Services, Inc. (CJES, Earnings, Analysts, Financials): Through its wholly-owned subsidiary, C&J Spec-Rent Services, Inc., provides specialty equipment services for oil and natural gas exploration and production companies in the Texas, Louisiana, and Oklahoma regions of the United States. Market cap at $1.04B, most recent closing price at $19.71.
2. Western Digital Corp. (WDC, Earnings, Analysts, Financials): Engages in the design, development, manufacture, and sale of hard drives worldwide. Market cap at $8.55B, most recent closing price at $34.88.
3. Sanderson Farms, Inc. (SAFM, Earnings, Analysts, Financials): Engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products. Market cap at $1.02B, most recent closing price at $44.53.
4. Titan International Inc. (TWI, Earnings, Analysts, Financials): Titan International and its subsidiaries manufacture wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States. Market cap at $816.2M, most recent closing price at $19.30.
5. Caterpillar Inc. (CAT, Earnings, Analysts, Financials): Manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. Market cap at $54.78B, most recent closing price at $83.86.
6. Seagate Technology PLC (STX, Earnings, Analysts, Financials): Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally. Market cap at $10.94B, most recent closing price at $27.90.
7. Watson Pharmaceuticals, Inc. (WPI, Earnings, Analysts, Financials): Engages in the development, manufacturing, marketing, sale, and distribution of generic and brand pharmaceutical products focused on urology and women's health in the United States, western Europe, Canada, Australasia, South America, and South Africa. Market cap at $11.09B, most recent closing price at $86.91.
8. Greenbrier Companies (GBX, Earnings, Analysts, Financials): Engages in the design, manufacture, and marketing of railroad freight car equipment in North America and Europe. Market cap at $461.55M, most recent closing price at $17.0.
9. Basic Energy Services, Inc. (BAS, Earnings, Analysts, Financials): Provides a range of well site services to oil and gas drilling and producing companies in the United States. Market cap at $510.01M, most recent closing price at $12.04.
10. Oil States International Inc. (OIS, Earnings, Analysts, Financials): Provides specialty products and services to the oil and gas drilling and production companies worldwide. Market cap at $4.11B, most recent closing price at $75.17.
Interactive Chart: Use the Compar-O-Matic to compare analyst ratings for the stocks mentioned above:
Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
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Dig Deeper: Access Company Snapshots, Charts, Filings
- C&J Energy Services, Inc. (CJES, Chart, Download SEC Filings)
- Western Digital Corp. (WDC, Chart, Download SEC Filings)
- Sanderson Farms, Inc. (SAFM, Chart, Download SEC Filings)
- Titan International Inc. (TWI, Chart, Download SEC Filings)
- Caterpillar Inc. (CAT, Chart, Download SEC Filings)
- Seagate Technology PLC (STX, Chart, Download SEC Filings)
- Watson Pharmaceuticals, Inc. (WPI, Chart, Download SEC Filings)
- Greenbrier Companies (GBX, Chart, Download SEC Filings)
- Basic Energy Services, Inc. (BAS, Chart, Download SEC Filings)
- Oil States International Inc. (OIS, Chart, Download SEC Filings)
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