Kee Ideas: The Hunt for Value and Growth Stocks

Kee Ideas: The Hunt for Value and Growth Stocks

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"Uncertainty is not a reason to change our investment strategy, it's why you have an investment strategy in the first place." These wise words come from Jim Kee, Chief Economist and President of South Texas Money Management.

In a phone interview with Kapitall, Kee explains the core analysis behind his Texas-based firm's investing strategies: Value and growth disciplines.

"Investors need to own growth stocks and value stocks because they tend to work as a natural hedge. They work inversely in short run but in long run they both go up."

More to the point, Kee defines "growth" as acceleration in sales and earnings, top and bottom line growing over the near term – usually three-year periods. "Value" is determined by a low price to cash flow and price to sales ratios, as well as a history of consistent cash flow generation.

Value By Sector

Technology: When looking at economic sectors that made the most earnings in cash flow, you'll find information technology firms. But when looking for total shareholder returns, tech is at the bottom. So, in accordance with growth and value opportunity, there's a natural attractiveness to tech relative to other sectors. Kee adds, "tech stocks are international stocks, and there's no regulatory overhang like energy financials and healthcare."

Utilities and telecom are largely undervalued and great dividend payers. Healthcare is also an undervalued industry that repetitively comes up in value screens. It has the largest sector weight, 16%, in South Texas Money Management's portfolio, followed by information technology (14%), consumer discretionary (13%), energy, and financials (12% each).

Top Value Picks

STMM's portfolio's top 10 holdings are as follows:

Sector SPDR Trust SBI Int – Utility
iShares S&P SmallCap 600 (IJR)
International Business Machines (IBM)
Patterson-UTI Energy (PDCO)
UnitedHealth Group (UNH)
Texas Instruments (TXN)
Bristol-Myers Squibb (BMY)
Archer Daniels Midland (ADM)
Hancock Holding (HBHC)
FedEx (FDX)

When asked which stocks are notable in his value and growth screens, Kee mentioned two others: 1. EMC Corporation (EMC): A growth technology company leaning toward computing and cloud computing. 2. Staples (SPLS): A class leader, Staples is the largest supplies retailer in the world and the second largest online retailer after Amazon. It functions in a fragmented industry but they have 10% of that industry and a strong international presence. 

Business Section: Investing Ideas

Looking to follow the investing advice of Jim Kee and South Texas Money Management? Here's a head start:

We ran a screen for equities meeting the following criteria:

1. Market caps above $50 million
2. Price/Free Cash Flow below 15
3. Price/Sales below 2
4. Positive sales growth in the past 5 years, and quarter over quarter
5. Positive EPS growth in the past 5 years, and quarter over quarter
6. Encouraging DuPont breakdown: Most recent quarter's (Net Profit margin)*(Asset turnover)*(Leverage ratio)

On the DuPont: Companies below have an increasing ROE along with the following positive characteristics: Decreasing leverage, i.e. decreasing Asset/Equity ratio. Improving asset use efficiency (i.e. increasing Sales/Assets ratio) and improving net profit margin (i.e. increasing Net Income/Sales ratio).  Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.

So what do you think of these names?

Interactive Chart: Use the Compar-O-Matic to compare analyst ratings for the stocks mentioned below:

 

“1. Assisted Living Concepts Inc. (ALC, Earnings, Analysts, Financials): Operates senior living residences in the United States. Market cap at $334.09M, most recent closing price at $14.74. P/S: 1.42. Price/FCF: 8.5. Sales growth over past 5 years: 2.61%. Quarter over quarter: 0.95%. Current EPS: 0.77. EPS growth over past 5 years: 9.24%. Quarter over quarter: 0.95%. MRQ net profit margin at 9.58% vs. 8.58% y/y. MRQ sales/assets at 0.127 vs. 0.123 y/y. MRQ assets/equity at 1.488 vs. 1.617 y/y.

 

“2. Ascena Retail Group Inc. (ASNA, Earnings, Analysts, Financials): Operates as a specialty retailer of apparel for women and tween girls in the United States and Puerto Rico. Market cap at $2.91B, most recent closing price at $18.98. P/S: 0.94. Price/FCF: 12.69. Sales growth over past 5 years: 17.51%. Quarter over quarter: 14.61%. Current EPS: 1.2. EPS growth over past 5 years: 12.9%. Quarter over quarter: 14.61%. MRQ net profit margin at 7.39% vs. 5.65% y/y. MRQ sales/assets at 0.449 vs. 0.437 y/y. MRQ assets/equity at 1.528 vs. 1.573 y/y.

 

“3. Belden, Inc. (BDC, Earnings, Analysts, Financials): Designs, manufactures, and markets cable, connectivity, and networking products in various markets, including industrial automation, enterprise, transportation, infrastructure, and consumer electronics. Market cap at $1.45B, most recent closing price at $32.66. P/S: 0.75. Price/FCF: 9.13. Sales growth over past 5 years: 5.79%. Quarter over quarter: 0.58%. Current EPS: 2.46. EPS growth over past 5 years: 10.11%. Quarter over quarter: 0.58%. MRQ net profit margin at 5.23% vs. 4.74% y/y. MRQ sales/assets at 0.263 vs. 0.26 y/y. MRQ assets/equity at 2.497 vs. 2.588 y/y.

 

“4. CF Industries Holdings, Inc. (CF, Earnings, Analysts, Financials): Through its subsidiary, CF Industries, Inc., manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide. Market cap at $10.93B, most recent closing price at $173.20. P/S: 1.76. Price/FCF: 6.82. Sales growth over past 5 years: 24.57%. Quarter over quarter: 30.12%. Current EPS: 23.68. EPS growth over past 5 years: 105.2%. Quarter over quarter: 30.12%. MRQ net profit margin at 24.12% vs. 24.02% y/y. MRQ sales/assets at 0.159 vs. 0.128 y/y. MRQ assets/equity at 1.95 vs. 2.106 y/y.

 

“5. Comcast Corporation (CMCSA, Earnings, Analysts, Financials): Provides entertainment, information, and communications products and services in the United States and internationally. Market cap at $77.78B, most recent closing price at $29.21. P/S: 1.34. Price/FCF: 10.3. Sales growth over past 5 years: 17.47%. Quarter over quarter: 22.67%. Current EPS: 1.61. EPS growth over past 5 years: 16.33%. Quarter over quarter: 22.67%. MRQ net profit margin at 8.23% vs. 7.78% y/y. MRQ sales/assets at 0.094 vs. 0.079 y/y. MRQ assets/equity at 3.327 vs. 3.33 y/y.

 

“6. CNO Financial Group, Inc. (CNO, Earnings, Analysts, Financials): Engages in the development, marketing, and administration of health insurance, annuity, individual life insurance, and other insurance products for senior and middle-income markets in the United States. Market cap at $1.61B, most recent closing price at $6.86. P/S: 0.39. Price/FCF: 2.37. Sales growth over past 5 years: 0.52%. Quarter over quarter: 7.12%. Current EPS: 1.21. EPS growth over past 5 years: 20.97%. Quarter over quarter: 7.12%. MRQ net profit margin at 5.26% vs. 4.33% y/y. MRQ sales/assets at 0.034 vs. 0.033 y/y. MRQ assets/equity at 7.057 vs. 8.134 y/y.

 

“7. Coventry Health Care Inc. (CVH, Earnings, Analysts, Financials): Operates as a managed healthcare company in the United States. Market cap at $4.38B, most recent closing price at $30.83. P/S: 0.34. Price/FCF: 6.06. Sales growth over past 5 years: 9.52%. Quarter over quarter: 21.09%. Current EPS: 4.15. EPS growth over past 5 years: 1.3%. Quarter over quarter: 21.09%. MRQ net profit margin at 4.62% vs. 3.62% y/y. MRQ sales/assets at 0.409 vs. 0.354 y/y. MRQ assets/equity at 1.918 vs. 2.015 y/y.

 

“8. Life Technologies Corporation (LIFE, Earnings, Analysts, Financials): Operates as a life sciences company with a focus on improving the human condition worldwide. Market cap at $7.47B, most recent closing price at $42.30. P/S: 1.96. Price/FCF: 10.59. Sales growth over past 5 years: 26.81%. Quarter over quarter: 4.82%. Current EPS: 2.27. EPS growth over past 5 years: 23.17%. Quarter over quarter: 4.82%. MRQ net profit margin at 14.12% vs. 10.46% y/y. MRQ sales/assets at 0.109 vs. 0.097 y/y. MRQ assets/equity at 1.824 vs. 2.117 y/y.

 

“9. Parker Hannifin Corporation (PH, Earnings, Analysts, Financials): Manufactures fluid power systems, electromechanical controls, and related components. Market cap at $12.74B, most recent closing price at $86.78. P/S: 0.99. Price/FCF: 14.07. Sales growth over past 5 years: 5.64%. Quarter over quarter: 4.74%. Current EPS: 7.27. EPS growth over past 5 years: 12.58%. Quarter over quarter: 4.74%. MRQ net profit margin at 9.2% vs. 8.63% y/y. MRQ sales/assets at 0.312 vs. 0.285 y/y. MRQ assets/equity at 1.952 vs. 2.075 y/y.

 

“10. RTI Biologics, Inc. (RTIX, Earnings, Analysts, Financials): And its subsidiaries produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues, and improve surgical outcomes. Market cap at $199.87M, most recent closing price at $3.61. P/S: 1.15. Price/FCF: 13.34. Sales growth over past 5 years: 18.01%. Quarter over quarter: 7.62%. Current EPS: 0.16. EPS growth over past 5 years: 33.66%. Quarter over quarter: 7.62%. MRQ net profit margin at 4.57% vs. 3.08% y/y. MRQ sales/assets at 0.189 vs. 0.183 y/y. MRQ assets/equity at 1.319 vs. 1.349 y/y.

 

“11. Standex International Corp. (SXI, Earnings, Analysts, Financials): Operates as a diversified manufacturing company in the United States and internationally. Market cap at $517.8M, most recent closing price at $41.78. P/S: 0.82. Price/FCF: 12.94. Sales growth over past 5 years: 1.44%. Quarter over quarter: 12.17%. Current EPS: 3.43. EPS growth over past 5 years: 11.13%. Quarter over quarter: 12.17%. MRQ net profit margin at 6.05% vs. 3.79% y/y. MRQ sales/assets at 0.331 vs. 0.281 y/y. MRQ assets/equity at 1.768 vs. 2.14 y/y.

 

“12. Symetra Financial Corporation (SYA, Earnings, Analysts, Financials): Operates as a financial services company in the life insurance industry in the United States. Market cap at $1.32B, most recent closing price at $11.34. P/S: 0.71. Price/FCF: 1.51. Sales growth over past 5 years: 2.73%. Quarter over quarter: 8.38%. Current EPS: 1.53. EPS growth over past 5 years: 2.74%. Quarter over quarter: 8.38%. MRQ net profit margin at 13.89% vs. 10.89% y/y. MRQ sales/assets at 0.019 vs. 0.019 y/y. MRQ assets/equity at 9.048 vs. 10.869 y/y.

 

“13. Tetra Tech Inc. (TTEK, Earnings, Analysts, Financials): Provides consulting, engineering, program management, construction, and technical services for resource management, infrastructure, and environment in the United States and internationally. Market cap at $1.6B, most recent closing price at $25.40. P/S: 0.83. Price/FCF: 11.2. Sales growth over past 5 years: 13.33%. Quarter over quarter: 10.83%. Current EPS: 1.51. EPS growth over past 5 years: 17.89%. Quarter over quarter: 10.83%. MRQ net profit margin at 4.67% vs. 4.07% y/y. MRQ sales/assets at 0.303 vs. 0.287 y/y. MRQ assets/equity at 1.679 vs. 1.822 y/y.

 

“14. Universal Health Services Inc. (UHS, Earnings, Analysts, Financials): Operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. Market cap at $3.78B, most recent closing price at $39.73. P/S: 0.52. Price/FCF: 13.88. Sales growth over past 5 years: 12.7%. Quarter over quarter: 3.86%. Current EPS: 4.19. EPS growth over past 5 years: 23.33%. Quarter over quarter: 3.86%. MRQ net profit margin at 7.05% vs. 6.5% y/y. MRQ sales/assets at 0.235 vs. 0.231 y/y. MRQ assets/equity at 3.207 vs. 3.635 y/y.

 

“15. Verint Systems Inc. (VRNT, Earnings, Analysts, Financials): Provides actionable intelligence solutions and value-added services worldwide. Market cap at $1.15B, most recent closing price at $29.94. P/S: 1.48. Price/FCF: 12.9. Sales growth over past 5 years: 16.24%. Quarter over quarter: 13.44%. Current EPS: 0.56. EPS growth over past 5 years: 17.77%. Quarter over quarter: 13.44%. MRQ net profit margin at 8.1% vs. 7.03% y/y. MRQ sales/assets at 0.141 vs. 0.136 y/y. MRQ assets/equity at 3.52 vs. 3.802 y/y.

 

 

(Written by Rebecca Lipman. Data sourced from Fidelity and Finviz.)

 

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