"Uncertainty is not a reason to change our investment strategy, it's why you have an investment strategy in the first place." These wise words come from Jim Kee, Chief Economist and President of South Texas Money Management.
In a phone interview with Kapitall, Kee explains the core analysis behind his Texas-based firm's investing strategies: Value and growth disciplines.
"Investors need to own growth stocks and value stocks because they tend to work as a natural hedge. They work inversely in short run but in long run they both go up."
More to the point, Kee defines growth as acceleration in sales and earnings, the top and bottom lines growing over the near term -- usually three-year periods. Value is determined by a low price to cash flow and price to sales ratios, as well as a history of consistent cash flow generation.
Value by sector
Technology: When looking at economic sectors that made the most earnings in cash flow, you'll find information technology firms. But when looking for total shareholder returns, tech is at the bottom. So, in accordance with growth and value opportunity, there's a natural attractiveness to tech relative to other sectors. Kee adds, "tech stocks are international stocks, and there's no regulatory overhang like energy financials and health care."
Utilities and telecom are largely undervalued and great dividend payers. Health care is also an undervalued industry that repetitively comes up in value screens. It has the largest sector weight, 16%, in South Texas Money Management's portfolio, followed by information technology (14%), consumer discretionary (13%), energy, and financials (12% each).
Top value picks
STMM's portfolio's top 10 holdings are as follows:
Sector SPDR Trust SBI Int -- Utility
iShares S&P SmallCap 600 (IJR)
International Business Machines (IBM)
Patterson-UTI Energy (PDCO)
UnitedHealth Group (UNH)
Texas Instruments (TXN)
Bristol-Myers Squibb (BMY)
Archer Daniels Midland (ADM)
Hancock Holding (HBHC)
FedEx (FDX)
When asked which stocks are notable in his value and growth screens, Kee mentioned two others: 1. EMC Corporation (EMC): A growth technology company leaning toward computing and cloud computing. 2. Staples (SPLS): A class leader, Staples is the largest supplies retailer in the world and the second largest online retailer after Amazon. It functions in a fragmented industry but they have 10% of that industry and a strong international presence.
Business section: Investing ideas
Looking to follow the investing advice of Jim Kee and South Texas Money Management? Here's a head start:
We ran a screen for equities meeting the following criteria:
1. Market caps above $50 million
2. Price/free cash flow below 15
3. Price/sales below 2
4. Positive sales growth in the past five years, and quarter over quarter
5. Positive EPS growth in the past five years, and quarter over quarter
6. Encouraging DuPont breakdown: Most recent quarter's (Net Profit margin)*(Asset turnover)*(Leverage ratio)
On the DuPont: Companies below have an increasing ROE along with the following positive characteristics: Decreasing leverage, i.e., decreasing Asset/Equity ratio. Improving asset use efficiency (i.e., increasing Sales/Assets ratio) and improving net profit margin (i.e., increasing Net Income/Sales ratio). Companies with all of these characteristics are experiencing increasing profits due to operations and not to increased use of financial leverage.
So what do you think of these names? (Click here to access free, interactive tools to analyze these ideas.)
1. Assisted Living Concepts: Operates senior living residences in the United States. Market cap at $334.09M, most recent closing price at $14.74. P/S: 1.42. Price/FCF: 8.5. Sales growth over past 5 years: 2.61%. Quarter over quarter: 0.95%. Current EPS: 0.77. EPS growth over past 5 years: 9.24%. Quarter over quarter: 0.95%. MRQ net profit margin at 9.58% vs. 8.58% y/y. MRQ sales/assets at 0.127 vs. 0.123 y/y. MRQ assets/equity at 1.488 vs. 1.617 y/y.
2. Ascena Retail Group
3. Belden: Designs, manufactures, and markets cable, connectivity, and networking products in various markets, including industrial automation, enterprise, transportation, infrastructure, and consumer electronics. Market cap at $1.45B, most recent closing price at $32.66. P/S: 0.75. Price/FCF: 9.13. Sales growth over past 5 years: 5.79%. Quarter over quarter: 0.58%. Current EPS: 2.46. EPS growth over past 5 years: 10.11%. Quarter over quarter: 0.58%. MRQ net profit margin at 5.23% vs. 4.74% y/y. MRQ sales/assets at 0.263 vs. 0.26 y/y. MRQ assets/equity at 2.497 vs. 2.588 y/y.
4. CF Industries Holdings
5. Comcast
6. CNO Financial Group
7. Coventry Health Care: Operates as a managed health care company in the United States. Market cap at $4.38B, most recent closing price at $30.83. P/S: 0.34. Price/FCF: 6.06. Sales growth over past 5 years: 9.52%. Quarter over quarter: 21.09%. Current EPS: 4.15. EPS growth over past 5 years: 1.3%. Quarter over quarter: 21.09%. MRQ net profit margin at 4.62% vs. 3.62% y/y. MRQ sales/assets at 0.409 vs. 0.354 y/y. MRQ assets/equity at 1.918 vs. 2.015 y/y.
8. Life Technologies
9. Parker Hannifin: Manufactures fluid power systems, electromechanical controls, and related components. Market cap at $12.74B, most recent closing price at $86.78. P/S: 0.99. Price/FCF: 14.07. Sales growth over past 5 years: 5.64%. Quarter over quarter: 4.74%. Current EPS: 7.27. EPS growth over past 5 years: 12.58%. Quarter over quarter: 4.74%. MRQ net profit margin at 9.2% vs. 8.63% y/y. MRQ sales/assets at 0.312 vs. 0.285 y/y. MRQ assets/equity at 1.952 vs. 2.075 y/y.
10. RTI Biologics: And its subsidiaries produce orthopedic and other surgical implants that repair and promote the natural healing of human bone and other human tissues, and improve surgical outcomes. Market cap at $199.87M, most recent closing price at $3.61. P/S: 1.15. Price/FCF: 13.34. Sales growth over past 5 years: 18.01%. Quarter over quarter: 7.62%. Current EPS: 0.16. EPS growth over past 5 years: 33.66%. Quarter over quarter: 7.62%. MRQ net profit margin at 4.57% vs. 3.08% y/y. MRQ sales/assets at 0.189 vs. 0.183 y/y. MRQ assets/equity at 1.319 vs. 1.349 y/y.
11. Standex International: Operates as a diversified manufacturing company in the United States and internationally. Market cap at $517.8M, most recent closing price at $41.78. P/S: 0.82. Price/FCF: 12.94. Sales growth over past 5 years: 1.44%. Quarter over quarter: 12.17%. Current EPS: 3.43. EPS growth over past 5 years: 11.13%. Quarter over quarter: 12.17%. MRQ net profit margin at 6.05% vs. 3.79% y/y. MRQ sales/assets at 0.331 vs. 0.281 y/y. MRQ assets/equity at 1.768 vs. 2.14 y/y.
12. Symetra Financial: Operates as a financial services company in the life insurance industry in the United States. Market cap at $1.32B, most recent closing price at $11.34. P/S: 0.71. Price/FCF: 1.51. Sales growth over past 5 years: 2.73%. Quarter over quarter: 8.38%. Current EPS: 1.53. EPS growth over past 5 years: 2.74%. Quarter over quarter: 8.38%. MRQ net profit margin at 13.89% vs. 10.89% y/y. MRQ sales/assets at 0.019 vs. 0.019 y/y. MRQ assets/equity at 9.048 vs. 10.869 y/y.
13. Tetra Tech: Provides consulting, engineering, program management, construction, and technical services for resource management, infrastructure, and environment in the United States and internationally. Market cap at $1.6B, most recent closing price at $25.40. P/S: 0.83. Price/FCF: 11.2. Sales growth over past 5 years: 13.33%. Quarter over quarter: 10.83%. Current EPS: 1.51. EPS growth over past 5 years: 17.89%. Quarter over quarter: 10.83%. MRQ net profit margin at 4.67% vs. 4.07% y/y. MRQ sales/assets at 0.303 vs. 0.287 y/y. MRQ assets/equity at 1.679 vs. 1.822 y/y.
14. Universal Health Services: Operates acute care hospitals, behavioral health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers. Market cap at $3.78B, most recent closing price at $39.73. P/S: 0.52. Price/FCF: 13.88. Sales growth over past 5 years: 12.7%. Quarter over quarter: 3.86%. Current EPS: 4.19. EPS growth over past 5 years: 23.33%. Quarter over quarter: 3.86%. MRQ net profit margin at 7.05% vs. 6.5% y/y. MRQ sales/assets at 0.235 vs. 0.231 y/y. MRQ assets/equity at 3.207 vs. 3.635 y/y.
15. Verint Systems: Provides actionable intelligence solutions and value-added services worldwide. Market cap at $1.15B, most recent closing price at $29.94. P/S: 1.48. Price/FCF: 12.9. Sales growth over past 5 years: 16.24%. Quarter over quarter: 13.44%. Current EPS: 0.56. EPS growth over past 5 years: 17.77%. Quarter over quarter: 13.44%. MRQ net profit margin at 8.1% vs. 7.03% y/y. MRQ sales/assets at 0.141 vs. 0.136 y/y. MRQ assets/equity at 3.52 vs. 3.802 y/y.
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.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above. Data sourced from Fidelity and Finviz.
