5 Great Bargain-Priced Stock Picks
The mood at the conference for value investors in Pasadena, Cal., was grim. So what else is new? True bargain hunters are never satisfied. If they're finding plenty of opportunities, it's probably because the economy is a disaster, as it was in March 2009, when value mavens could act like kids in a candy store. If things are going swimmingly and markets are performing well, cheapskates complain about the dearth of bargains. Sometimes you just can't win.
But things seemed glummer than usual at the just-concluded West Coast version of the Value Investing Congress. More than a dozen investing gurus -- ranging from Steve Romick, manager of the FPA Crescent Fund, a member of the Kiplinger 25, the list of our favorite no-load mutual funds, to former Fidelity fund manager Jeffrey Ubben, now the proprietor of a hedge fund called ValueAct Capital -- presented their gloomy views on the U.S. They were nearly unanimous in their views that the best opportunities were overseas -- primarily in emerging markets, where the investing landscape can be treacherous but where growth, government debt and demographic trends are more favorable. The few recommending U.S. stocks were touting issues that they expected to recover from a recent pummeling.
Here are five of the best ideas that came out of the conference, which took place May 3-4.
Ingram Micro (symbol IM)
Recommended by: Kian Ghazi, co-founder of Hawkshaw Capital Management, a New York City hedge fund
Shares of Ingram Micro plunged on April 29 after the distributor of software and technology equipment announced that it had badly missed first-quarter earnings estimates. Earnings of 34 cents per share were down roughly 20% from the same period a year earlier and fell far short of the 48 cents that analysts had been expecting. The culprit was a new business management system that the company is still struggling to implement in Australia. The problem is expected to impact second-quarter results as well.
Ingram Micro is also living in the shadow of “cloud computing,” which may restrict future software sales, says Ghazi. But at $18.84, the stock trades at just ten times estimated 2011 earnings of $1.86 per share (all share prices and related data are through May 6). Ghazi thinks the market is pricing the stock based on an “Armageddon scenario.” A fair price for the shares would be closer to $36, he says. “Fears of the cloud are overblown,” he says. “It’s a real but manageable issue.”
Recommended by: Guy Gottfried, founder and manager of Rational Investment Group, a Toronto money manager
Guy Gottfried thinks that Americans who are worried about U.S. fiscal policy should look north. The Canadian government has managed to pull off 11 years of budget surpluses, and the country now has the lowest ratio of debt to gross domestic product among all the G-7 nations. It also had the fastest economic recovery. In that environment, Gottfried views Morguard Corp. (MRC.TO), a Canadian real estate company, as a great asset play (the symbol is for the shares trading on the Toronto Stock Exchange; Morguard also trades on the pink sheets in the U.S. under the symbol MRCBF.PK.
At $61.99 Canadian, the stock sells for nine times earnings. Moreover, Gottfried says the share price understates the value of the company’s vast high-quality portfolio of rental properties and its outstanding management, led by Rai Sahi, Morguard’s 64-year-old CEO, and one of Canada’s few corporate raiders.
Analysts tend to ignore Morguard because it pays relatively paltry dividends and Sahi owns half of the company. But the stock has gained 30% so far this year, and Gottfried thinks it’s got further to go. “This is a quality business at a great price, with great management,” he says.
G. Willi-Food International (WILC)
Recommended by: Ori Eyal, founder and portfolio manager of Emerging Value Capital Management, a New York City hedge fund
Remember the punch line for those Hebrew National hot dog ads? “We answer to a higher authority.” Well, it turns out that a growing number of health-conscious consumers are interested in eating kosher food, whether they’re Jewish or not. And that’s a trend on which G. Willi-Food, a small Israeli food company, wants to capitalize. The company searches the world for popular menu items and then works with the manufacturers to render them kosher, says Eyal, an Israeli-American.
With the stock at $7.60, the company’s market value is just a shade above $100 million. But G. Willi-Food holds about half of that amount in cash -- a stockpile it built up in the hope of buying a U.S. distributor. The search for a distributor has been slow, and Eyal says company officials have told him that they would distribute the cash to shareholders through a special dividend if they’re unable to find an acceptable partner.
For now, sales are predominantly in Israel and growing at a nice clip -- about 15% annually. But rising food prices cut net profits by 7.2% last year. Eyal thinks the company’s growth prospects are bright, but Willi-Food also is talking to investment bankers, which suggests that it could become a takeover target.
Gujarat State Fertilizers & Chemicals (GSFC.BO)
Recommended by: Rahul Saraogi, managing director of Atyant Capital Advisors, an India-based money manager
The numbers look mouthwatering. India has a consumer market of 1.2 billion people, who are slowly moving from a rural to an urban environment and becoming increasingly wealthy. Whereas the populations in most developed countries are getting long in the tooth and penurious, more than 50% of India’s people are under the age of 25, with their prime spending years well ahead of them. That’s helped fuel economic growth of nearly 9% a year. The country also boasts one of the oldest stock exchanges in Asia, with more than 6,000 listed companies. (You’ll have to buy this stock on the Bombay exchange; check with your broker to see if it permits this.)
India’s market would be a paradise for value investors if corruption wasn’t so widespread. As it is, the market is like a minefield, says Saraogi.
Saraogi addresses this challenge by turning stock selection around. Instead of looking first at the numbers, he looks at governance and stewardship issues to see if a company’s managers can be trusted. That’s when he turns to numbers, aiming for companies that sell at a fraction of their true value. He thinks he’s found just that bargain with Gujarat State Fertilizers & Chemicals, a company that’s 38% owned by the Indian government. At a recent price of 372.05 rupees, Gujarat sells for about five times earnings; it has a strong balance sheet and loads of cash. Meanwhile, the market for fertilizer is soaring.
Coal India Ltd. (COALINDIA.BO)
Recommended by: Jonathan Friedland, director of international research for the Amici Global Funds for Porter Orlin, a New York City hedge fund manager
Coal India brings together the best characteristics of a growth stock and a utility, says Friedland. India’s rapidly growing economy is producing voracious demand for energy, and this company, which is 90% owned by the Indian government, produces coal for about half the cost of imported coal, giving it considerable pricing power.
The stock, which closed at 369.25 rupees, got hit recently when the Ministry of Environment halted the company’s ambitious growth plans. But with power shortages looming, Friedland doesn’t expect that to last. The stock trades at just 12 times earnings, and those earnings are underreported because of accounting restrictions that, Friedland says, are about to change. Factoring in those changes, Friedland says the real price-earnings ratio is closer to 10, compared with 15 to 20 times earnings for similar companies. As with Gujarat, you’ll need a broker that lets you trade in India’s market to buy this stock.