This article is part of our Rising Star Portfolios series.
When I look for companies for the Messed-Up Expectations portfolio, the primary criterion is that the expected growth in free cash flow be close to or less than zero over the next several years. The next step, of course, is to determine whether the market is correct about those expectations or whether there's something being overlooked. And it is here where my judgment failed in regard to purchasing shares of Oshkosh
Unlike the situation when I purchased Textron
Worse, operating margin for each is expected to remain in the low to mid-single digits for the remainder of this year and next year, according to management. That's going to keep net income low, which, in turn, will keep free cash flow low.
There's also the fact that days sales outstanding and days inventory outstanding have both increased substantially over the past year. I called this out as a negative when I looked at competitor General Dynamics
Oshkosh turned out to be a value trap in that there was a very real reason expectations were so low -- the winding down of the M-ATV program with no clear replacement in sight. What I failed to appreciate was how long that situation was likely to last.
Accordingly, the MUE portfolio will close its position in Oshkosh tomorrow.
Though Oshkosh is unlikely to go broke, it's likely to be a disappointing investment for a while. Instead, check out our free report detailing two-small cap stocks that have solid deals with the government and have the potential to deliver multibagger returns. You'll find it here: "Two Small to Fail: Two Small Caps the Government Won't Let Go Broke." It's completely free.
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).