Every once in a while, we come across an investing strategy that gives a moment of pause. For me, that moment came with meeting Bob Auer, Senior Portfolio Manager of the AUER Growth Fund (AUERX). Some years, he's seen his fund double in value and other times fall by half, but through the price fluctuations, Auer has stayed true to a straightforward and aggressive investment strategy.
"We don't pick stocks," cites the AUER website, "but rather, stocks pick us since we purchase nearly every stock that meets our qualifications." So what tall order requirements have the fund set? Simply this:
Stocks must meet all of the following criteria:
- Profits up 25% year over year
- Sales up 20% year over year, for substantial sales and earnings growth
- Price/Earnings of 12 or under, and has decreased substantially over the prior 12 months.
The stocks must also meet a number of other metrics included in their proprietary screening process. Shares are sold when it has made a 100% return. The stocks are still eligible for the next round of investments.
In an interview with Kapitall, Auer explains, "We look at stocks with U.S. ticker symbols 4 times per year, and we're willing to take any one that meets our criteria. There are almost 8,000 companies when you take ETFs and REITS into account, although ETFs never make the cut."
Toggle between the 3 and 1-year time frames to see how AUREX has performed relative to the S&P 500 index.
Why this strategy?
The strategy itself was born out of a revelation his father had when comparing two similar corner apothecaries in Indianapolis. One, Hook's Drug Stores, grew at a 5% rate at five-year compounded and was eventually bought out by CVS. The second is Eli Lilly, which grew at a 20% rate at five-year compounded, and went on to mint millionaires. It is now worth over $61 billion.
The secret, his father had said, must be in the high growth rate: If sales are going up 20%, they must have economies of scale. It was the foundation for the strategy detailed above. It's a discipline, Bob says, that ensures his fund is always investing in fast growing companies at "ridiculously low prices."
What are some undiscovered growth and value stocks that continually come up in your screens?
In the energy industry, there's a tendency for stocks associated with fracking and natural gas to make it through. Here are some notable names.
For three quarters, the firm has held shares of Basic Energy Services (NYSE: BAS ) , which currently trades below $12 with a P/E of 5.85. The company own big trucks that can pump in chemicals at well sites. "It's probably an EPA hazard," adds Auer, "and we don't know the overhang on that. People think a Romney win will decrease EPA influence and open up more drilling."
Also in the energy space is Argan (NYSE: AGX ) , a firm that converts coal fired electric plants to natural gas. "Both presidential candidates are pro natural gas. Utilities are also tired of regulations with coal and dirty energy sources. It costs Argan around $100 million to retrofit a plant, and they have all the engineers and knowledge to do it. The firm is winning big contracts, and it doesn't hurt that Japan and Germany are phasing out atomic energy."
In the Pharmaceutical industry, Auer finds Impax Laboratories (Nasdaq: IPXL ) of special interest. The $1.7 billion specialty pharmaceutical company makes generic drug products, and its pipeline looks juicy: "They just got first mover to a billion dollar drug Adderall. It's driving sales and revenue growth. 7 of 42 products in their pipeline will be the lead generic on the market, and they started research to come out with their own branded products. Particularly, they're in phase 3 for a Parkinson's medication. The stock is regularly hitting 52-week high."
EDAC Technologies Corporation (Nasdaq: EDAC ) . Auer talks passionately about this stock, and it truly is noteworthy. This small $68 million firm engages in complex sub assemblies. A brilliant staff of technicians works on large and specialized machines, connecting circuits with complex custom manufacturing on a production basis that is very intricate. "This isn't something you can take over to China. The company has a backlog of two-and-a-half years of work."
In commodities, Auer's favorite gold stock is Primero Mining Corp (NYSE: PPP ) . "You can buy it for less than Book Value (BV). If gold goes to 2.5k/ounce, why not buy it where you can buy it for less than a dollar?"
Press play to see changes in annual return for the stocks mentioned here:
Interested in mimicking the strategy of Auer? In truth, anyone can mimic it by using the rules mentioned above. For those interested in what names have already made the cut, we list the 10 stocks that currently hold top rank in the AUER Growth Fund portfolio:
1. C&J Energy Services: Through its wholly owned subsidiary, C&J Spec-Rent Services,, provides specialty equipment services for oil and natural gas exploration and production companies in the Texas, Louisiana, and Oklahoma regions of the United States.
2. Western Digital: Engages in the design, development, manufacture, and sale of hard drives worldwide.
3. Sanderson Farms: Engages in the production, processing, marketing, and distribution of fresh, frozen, processed, and prepared chicken products.
4. Titan International: Titan and its subsidiaries manufacture wheels, tires, and assemblies for off-highway vehicles used in the agricultural, earthmoving/construction, and consumer markets in the United States.
5. Caterpillar: Manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide.
6. Seagate Technology: Designs, manufactures, markets, and sells hard disk drives for the enterprise, client compute, and client non-compute market applications in the United States and internationally.
7. Watson Pharmaceuticals: Engages in the development, manufacturing, marketing, sale, and distribution of generic and brand pharmaceutical products focused on urology and women's health in the United States, western Europe, Canada, Australasia, South America, and South Africa.
8. Greenbrier Companies: Engages in the design, manufacture, and marketing of railroad freight car equipment in North America and Europe.
9. Basic Energy Services: Provides a range of well site services to oil and gas drilling and producing companies in the United States.
10. Oil States International: Provides specialty products and services to the oil and gas drilling and production companies worldwide.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Disclosure: Kapitall's Rebecca Lipman does not own any of the shares mentioned above. This is an abridged version of the original post on Kapitall wire.