Finding Mid Caps for a Winning Portfolio

This article is part of our Rising Star Portfolios Series.

As a Motley investor, I get to scan the universe for investment ideas, no holds barred. I view this as a luxury, but it can also be a curse at times. Why? The problem is that sometimes there is just so much stuff out there that it can be really tough to whittle it all down to a few good choices.

One of the best things we can do as investors is constantly keep a watchlist, adding and deleting as we work our way toward investing greatness. What I like to do from time to time is throw down a few parameters and run a screen. Then I sift through it and find the gold nuggets that lie within.

So let's give it a whirl. I ran a screen for mid-cap stocks (between $5 billion and $7 billion market cap) trading on major U.S. exchanges, with inside ownership greater than 2% and an operating margin of 15% or better. Twenty-four companies made the cut; five caught my eye, and I'm considering two for the list:

Company

Inside Ownership

Operating Margin

Dolby (NYSE: DLB  ) 52.4% 48.3%
Hasbro (Nasdaq: HAS  ) 10.3% 15.5%
Cincinnati Financial (Nasdaq: CINF  ) 6.5% 18.5%
Garmin (Nasdaq: GRMN  ) 44.9% 25.6%
Stericycle (Nasdaq: SRCL  ) 4.3% 27.2%

Source: Capital IQ, a division of Standard & Poor's.

In a world of toys, Mr. Potato Head is king
I have written about Hasbro before. From toys like Transformers and G.I. Joe to games like Monopoly and Trivial Pursuit, the company has a tremendous catalog of brands and products that are known the world over. One of the most attractive propositions about the company is its target audience: kids. They're everywhere, and chances are you either know one or have one (or more). The growing global population of kids means an even bigger audience for Hasbro.

And it's not just your parents' toys and games anymore. Companies like Activision Blizzard and Discovery Communications are helping Hasbro leap into the digital age. Hasbro's foray into motion pictures with Universal Pictures is proving to be quite successful as well, with Transformers 3 coming out later this year and Battleship due out in 2012.

If that's not enough, Hasbro gives investors exposure to emerging economies around the world. In 2009, Hasbro generated more than 40% of total revenues from its international segment, including Europe, Asia, and Latin and South America. The stock is trading at 15.5 times earnings today, which isn't unreasonable considering the growth opportunities still available.

A sticky situation
Stericycle is in the business of waste management. But it isn't just any old trash. No siree-bob. We are talking dangerous stuff here: medical waste, sharps disposal, and hazardous and pharmaceutical waste disposal. Stericycle is North America's largest provider of medical waste services. Its established processing networks ensure the safe and timely disposal of medical waste from start to finish.

The company estimates that in 2009 the global market for its services was approximately $10.5 billion; Stericycle has more than 11% share of that market with the intention of gaining more. As the population continues to age and more individuals gain access to health insurance, there stands to be more medical waste.

I would be remiss if I neglected to mention the slug of debt the company has on its books, to the tune of almost $1 billion. I am not terribly bothered by this, though, as the company produces a steady stream of free cash flow, averaging just over $150 million since 2005. With a coverage ratio greater than 10 and consistent demand for its services, Stericycle seems to have a good hold on its debt. The stock looks a little pricey at 34 times earnings, but it's still worth keeping an eye on.

Add 'em to the list
So there it is: one screen, five stocks, and two ideas for my watchlist. That is one way I get companies on my radar and I'll keep on searching for more great ideas to take my Motley portfolio to new heights. You can follow along; just swing on by my discussion board and let's talk; I'm also on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Stericycle is a Motley Fool Rule Breakers recommendation. Dolby Laboratories and Hasbro are Motley Fool Stock Advisor selections. Hasbro is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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