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Stock Screen: Stocks with Healthy Price Appreciation Potential - October 24, 2011
In this screen, we focus on stocks that are expected to perform well both in the next six to 12 months and for the pull to 2014-2016. To be included in our list, issues had to be ranked 3 (Average), or better, for Timeliness (i.e. relative price performance in the year ahead), one of Value Line’s many proprietary rankings. Additionally, capital-appreciation potential over the next three to five years, as derived from our analysts’ earnings projections, had to be at least 130%. Next, the minimum annual total return potential (a combination of price appreciation and dividends) was pegged at 23%. Meanwhile, to eliminate stocks that have more-than-normal risk, we called for Safety ranks (another one of Value Line’s proprietary measures) of no worse than 3 (Average). That is, Safety ranks of 4 (Below Average) and 5 (Lowest) were excluded. Finally, any stock that had recently traded at a price of less than $10 a share was dropped from the list.
The resulting group is expected to perform at least in line with, if not better than, the broad market in the near term. Better yet, our analysts feel that these stocks appear to be good long-term holdings. Investors should note that all data for this screen are from the Value Line Investment Survey dated October 7, 2011. To see the complete list of 16 stocks (limited to those ranked to outperform the broader market in the year ahead), investors can click here.
And given their excellent price-appreciation prospects, these equities might be expected to trade at a premium to the market. Nonetheless, our list does not neatly conform with such logic, since only about 25% of the stocks in the current roster are trading at price-to-earnings ratios above 15.0. In fact, some appear to be trading at a meaningful discount to the market.
ArcelorMittal (MT) is one of the world’s largest integrated steel companies with a presence in over 20 countries spanning four continents. It boasts approximately 40% share of its core markets which include automotive, construction, household appliances and packaging. Its specific products are slabs, color-coated coils, sheets, bars, wire rods, structural sections, rails, and wire products. ArcelorMittal's worldwide crude steel production in 2010 was around 91 million tons.
These shares have lost a fair amount of value in recent months, reflecting the broader market selloff and concerns that steel volumes in developed and emerging countries will slow in the coming quarters. Management has admitted evidence of a slowdown and that some customers are becoming more cautious. Still, we think the company is better insulated from a demand slump than in the past and doubt any future weakness will come close to the quick 75% decline in the price of scrap experienced this time three years ago. Indeed, MT has successfully reduced its energy consumption and input costs to achieve a higher yield and improved product quality. Since 2008, the company has generated $3.6 billion of these “management gains”, and is well on track to achieve $4.8 billion by the end of 2012. Also, the balance sheet is in solid shape considering the company pared more than a third of its debt over the past three years. Management said inventory levels were not building (excluding Brazil), and it has been able to raise prices in the past few weeks, as well.
Shares of MT are near their 52-week low, which may represent a good buying opportunity. Recent price weakness, along with the stock’s positive short- and long-term prospects, gives it compelling price appreciation over the 3- to 5-year time frame.
Parametric Technology (PMTC) develops, markets, and supports solutions that manage product information, and improve product development. Its software enables customers to create digital product content, collaborate with others in the development process, control product content, automate product development processes, and communicate information to people and systems across the extended enterprise and design chain. It generates revenues through the sale of software licenses, maintenance services, consulting and training services.
The Product Lifecycle Management (PLM) solutions include Windchill, an Internet-based content and management solutions product that enables customers to manage complex data. The desktop solutions software suite consists of Creo Elements/Pro which features a modeler that allows changes to the design process to be consistently updated. There are several other software products in the company’s portfolio that allow businesses to more efficiently manage data and, improve its accuracy, as well as lower production expenses.
New products for both the desktop business, as well as Windchill are enhancing the company’s near- and long-term prospects. Functionality enhancements for Creo are tapping into previously unexplored markets, and are doing well to revitalize demand. In addition, the Enterprise division should boost top- and bottom-line growth, and more favorable pricing and good unit-volume growth is positive and are reflected in our upbeat forecast for long-term price appreciation potential.
Titan International Inc.
Titan International (TWI), along with its subsidiaries, manufactures wheels, tires, and other assembly parts for off-highway vehicles. The company’s products serve several markets, such as agricultural, construction/earthmoving, and consumer markets in the United States. Products in the earthmoving and construction fields include those supplied to the U.S. government. Consumer-market products include all-terrain vehicles and recreational/utility vehicles. The company sells these items to OEMs (original equipment manufacturers) as well as to distributors and dealers.
The near-term outlook for TWI appears favorable. Healthy top- and bottom-line advances are being realized through high demand in each of the company’s operating segments. In addition, the recent acquisition of the Goodyear Latin American farm tire business has been helping. To be sure, the recent solid results reported from Titan’s major client Caterpillar Inc. (CAT - Free Caterpillar Stock Report) are also helping improve investor sentiment.
Long-term earnings expansion will likely be realized through an extended geographic footprint and demand should be enhanced because the world’s farming markets are growing. Although there is some volatility expected from these shares, long-term appreciation potential is above average for the 2014-2016 timeframe, thus, patient accounts may wish to consider these shares.
At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.