After working my way through a list of promising-looking US stocks, these 10 made it onto my watchlist.
Trump’s Tax Reforms
Recently, I decided to take a look at the US market. I was curious to see how Trump’s tax reform package was affecting corporate earnings. The changes that were enacted at the end of last year were quite significant, dropping the official tax rate from 35% all the way down to 21%. I wanted to see if this fairly massive windfall had produced any potential bargains south of the border.
Using a stock screening tool, I put together a list of a couple of hundred potential investment candidates. (For those new to investing, you can read my blog post on stock screeners here.) Working my way through the list from A to Z, I had some early success and hit pay dirt in the B’s with the discovery of Big Lots which I added to my portfolio a couple of weeks ago. It took me a while to work my way down to Z and sadly, there was nothing else I felt excited enough about to buy, but I did come across a number of companies that seemed to offer some interesting potential. None of them prompted me to do a deep dive, but I’ll be following these names closely to see if they might be candidates for the portfolio down the road. If Big Lots was the winner of this particular contest, I think of these other companies as the runners up.
The US Top Ten Runners Up
The New Home Company Inc. NWHM – $10.21
A luxury home builder in California. Trading below book value and at an adjusted p:e ratio of around 8. Recently they have doubled the number of lots in their inventory which could bode well for future growth, provided the housing sector doesn’t collapse again. But with housing prices in California as high as they are, I wasn’t sure I felt comfortable making this bet.
Zagg Inc ZAGG – $15.25
This company makes the invisible shield screen protectors for smartphones that you see in display racks wherever smart phones are sold. They have made every effort to diversify into other smartphone and tablet accessories (keyboards, headphones) and recently made a large acquisition of an external power supply company (Mophie). Zagg has done very well over the years, growing at a rapid pace and at the current p:e of around 11, you don’t seem to have to pay too much for this growth, but even though they have tried to diversify beyond their initial, patent protected screen protector product, this item still accounts for the bulk of their sales and, presumably, profits. I don’t know precisely when their patents may expire, but it always makes me nervous to invest in a company that could be a one-trick pony. The valuation is attractive, but not low enough at the moment to entice me to buy in.
Universal Corp UVV – $48.45
Universal buys tobacco leaves from farmers, processes them and sells them to cigarette manufacturers. The p:e is below 10, they have a good dividend yield of 4% and are in a stable, typically recession-proof industry. I feel a tad uneasy about the prospect of encouraging what is undoubtedly a less than healthy activity, so since it wasn’t mouth-wateringly cheap, I didn’t take the bait.
Cooper Tire & Rubber Co CTB – $25.40
As the name implies, these guys make tires. The p:e is around 8 but their debt is on the high side. They make tires almost exclusively for the replacement market. Results have been very stable over the years and it seems to me that they may be better protected from the headwinds facing the auto sector than many other car related companies. If electric cars take over the roads, for example, they’re still all going to need tires. And if consumers have overspent on shiny, new SUVs, and sales of new vehicles dry up for a while, the tires on all those new vehicles are still going to need replacing. But with no past history of growth and no reason to expect growth to accelerate in the future, there seem to be better opportunities in the auto sector in Canada at equivalent prices.
Francesca’s Holdings Corp FRAN – $5.73
Probably my favourite from this list of contenders. I’m a sucker for a good turnaround story and Francesca’s is a chain of women’s clothing and accessory stores that has seen its earnings slump in the past year, taking its stock price down with it. The stock is trading at 9 times trailing earnings but only 4.5 times last year’s peak earnings. I’ve never been in a Francesca’s and am not an 18 to 35 year old woman (their target demographic) but the images I saw online made it look like an attractive store. When clothing chains fall out of fashion, though, it can take years for them to recover and many never do. Is this year’s slump a temporary phenomenon or will the malaise be longer lasting? I’ll be watching future quarterly results to see how the story plays out.
Sanderson Farms, Inc. SAFM – $107.02
These guys grow, process and sell chicken. I have to admit I feel a wee bit squeamish about buying into industrial chicken farming but at this point in the business cycle, I am drawn to these more recession-proof businesses. However, it would take a lower valuation to overcome my admittedly weak ethical qualms.
Dicks Sporting Goods Inc DKS – $30.54
Part of the “retail apocalypse” brigade. Earnings have been flat for the past 5 years but sales have been steadily climbing and things could have been a lot worse. With a trailing p:e of around 10, this seems to offer pretty decent value. But I like my Big Lots better.
Dillard’s, Inc. DDS – $77.33
Similar to Dick’s. Earnings flat but sales per share have been growing. P:E around 10.
Argan, Inc. AGX – $38.50
A design and construction firm specializing in building natural gas powered power plants. They have done very well over the past couple of years with a string of large-scale projects. The stock is trading at a low p:e of around 9 to trailing earnings but the concern is that their construction pipeline has dried up. They have a few projects waiting in the wings but not enough to fully replace the plants they are building now. Perhaps they will score some new contracts and replenish their backlog but until they do, they seem like a riskier proposition. All those Teslas are going to need to get their juice from somewhere, though, and with fracking throwing off acres of dirt cheap natural gas, surely someone will start building more gas-powered power plants?
Johnson Outdoors JOUT – $74.90
I first stumbled across this stock when I was writing the “How To Find Winning Stocks: Narrowing The Search” blog post. (Of note, the stock is up 25% since then. And sadly, no, I didn’t buy it.) It’s not as cheap as the other stocks on this list but earnings have been growing strongly over the past few years as they enjoy strong demand for their new electric trolling motors. The most recent quarter was another blockbuster of a quarter for them with strong pre-season orders driving impressive earnings gains. But can they keep up this success? My worry is that they may have hit it big with their recent line of products, but longer term, I’m not seeing a consistent track record of growth.
(May 23, 2018: Russell 2000 closing price 1627.61)
In the end, what did I think of my detour south of the border? Certainly there is more to choose from than there is here in Canada, but in the end, the valuations were very similar, even after accounting for the big earnings boost that many companies will enjoy from the tax cuts. Apart from Big Lots, there wasn’t anything that was cheap enough to prod me into selling off some of my Canadian holdings to buy. I generated some interesting leads, though, and will be following them as their story evolves.
Full Disclosure: I own Big Lots but do not own shares in any of the other companies mentioned in this post.