This article is part of our Rising Star Portfolios series.
As an opportunistic investor, I'm constantly scanning the stock universe for companies worth digging into. When I come across something with potential, I add it to my watchlist. Here are three I'm adding today.
Salute your teacher: American Public Education
The for-profit education sector has taken a beating in the last year, for good reason. Many of these companies' so-called "guidance counselors" were actually school salespeople in disguise. Studies found scant evidence that many for-profit colleges' graduates became more employable, and to fund their educations, too many students took on debt loads that proved nigh-impossible to pay off.
However, not all for-profit colleges are created equal, and American Public Education (Nasdaq: APEI ) stands head and shoulders above the rest. This college has a distinct target student demographic: military servicemembers. Founded by a former Marine, the business is a tightly run ship, with return on equity running more than 30% over the last four years, and no debt on the balance sheet. Deployments create natural volatility in the student base, but still, the number of students has rocketed from 30,000 in 2007 to more than 63,000 at the last count.
Many of the concerns surrounding other private educators don't apply to American Public Education. As I dig in further, I'll be looking closely at the sources of financing for tuition payments and at possible effects of regulatory changes in the industry.
Spice up the portfolio: McCormick
Spice master McCormick (NYSE: MKC ) offers investors a compelling value proposition: Its products cost less than 10% of a meal, but account for more than 90% of the flavor. That's a great deal, and the company offered an equally compelling stock for investors seeking to capitalize on consumers' increased propensity to eat at home during tough economic times.
McCormick might have another offer on tap for investors. Food commodity prices have skyrocketed in the last year, with corn and wheat up 75% and 66%, respectively. That means consumers are likely to see food prices in the grocery store jump in the coming year. This is good news for the industrial side of McCormick's business, which caters to industrial food companies looking to cut costs while keeping the same flavor in their products. Facing rising input costs, customers such as PepsiCo (NYSE: PEP ) , McCormick's largest industrial customer, will likely demand more of the company's cost-cutting services.
1 + 1 + 1 = 4: ITT
Large-cap conglomerate ITT (NYSE: ITT ) isn't really my style. But when this $10 billion-market-cap goliath announced plans to break itself into three separate companies, it definitely caught my attention.
The company intends to split itself up into three stand-alone companies, roughly along the lines of its current operating divisions. Current shareholders will find themselves holding shares of an industrial engineering business, a water technology business, and a defense technology and information solutions business. With expected 2011 revenue of $2.1 billion, $3.6 billion, and $5.8 billion, respectively, none of the resulting companies will qualify as small. But new companies require new analysis from investors, and institutional investors who originally invested in ITT under one set of assumptions may indiscriminately sell their shares of one or more of the offspring companies.
I'm digging in now, so that when new information becomes available and the transaction eventually takes place, I'll already have done most of my analysis. That way, I'll be able to take advantage of any opportunities a wave of post-breakup selling might create.
Screening out the noise
Despite the myriad opportunities out there, the noise in the marketplace can be overwhelming. Developing and maintaining a watchlist is helpful in streamlining your efforts, and critical in allowing you to seize opportunities as they arise. American Public Education, McCormick, and ITT have earned spots on my watchlist, and you can click the names of each to add them to your radar at the Fool's MyWatchlist.com.
From here, I'll be running these companies through my investment process to determine whether they warrant a spot in the Young Gun Portfolio. To make sure you catch my thoughts on the other side of the research process, follow the Young Gun Portfolio 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.