Ladies and gentle Fools, today I feel like a kid in a candy store. Why? Because tomorrow (Thursday) at noon, the June issue of Motley Fool Hidden Gems is due to be released. Two more pre-excavated, pre-sorted, and pre-graded investing ideas will appear in my inbox and the email inboxes of thousands of other Fools around the world.
Mind you, when the issue comes out, you won't find me waiting by my keyboard, finger poised over the "buy" button, primed to pounce on the bounce of Tom Gardner's pick o' the month. That's just not my style. Like most Hidden Gems members, before I commit my hard-earned cash, I like to examine a potential jewel. Turn it over in my fingers. Consider its hidden value. And that takes time. So, no, I have no intention of buying the Hidden Gems recommendations when they're released. What's more, allow me to let you in on a secret ...
I don't really wait for the picks at all. I wait for the scorecard.
Playing with rocks
Every month, in addition to Tom's top recommendation and his guest analyst's pick (and three runner-up Watch List stocks and a handful of micro-cap ideas), the Hidden Gems online scorecard lists all past picks, their price on the day they were recommended, and a comparison of how well the stocks have performed against the S&P 500 since recommendation. That's what I'm talking about.
Sure, I love the new recommendations. But the overarching concept of Hidden Gems is to help members identify and buy into undervalued and unknown companies. And expecting a stock to be unloved on the day of its recommendation is like expecting the guests to ignore a debutante on the day of her ball.
It's not always easy to buy a Hidden Gem at an attractive price on recommendation day. That's a fact of life, and common to most investment newsletters. But it's also the reason I pay more attention to the scorecard than to the picks. I use the release date as my own Foolish alarm clock. It reminds me to review our old recommendations, update my spreadsheet on their relative valuations, and check on who's gone from undervalued to fairly valued, who to overvalued, and who still has room to run.
Because while today's picks will get all the glory today, last month's -- and the ones from months before -- were just as pretty when we picked 'em, sporting low price-to-free cash flow ratios, strong balance sheets, strong prospects for growth, and minimal name recognition on Wall Street. They're likely just as strong investment ideas today, but they have a considerably lower profile among investors because they're "yesterday's news." And that's fine with me. Just like in an eBay auction at three in the morning, I'm happiest bidding when there's no one else around. Because that's the time to find your best bargains.
Get to the point already -- what do you like?
Your wish is my command. To date, Hidden Gems has made 46 recommendations. Of those, eight were "re-recommedations," two have been acquired and delisted, and five companies proved bad calls and were "sold." Which leaves 31 unique recommendations out there for Fools seeking potentially great investments that the market has tossed aside. From among these, here are three that I think (and this is just one Fool's opinion, so feel free to join us on the discussion boards and tell me why I'm wrong) deserve a second look.
Let's start small. Radyne ComStream (NASDAQ:RADN) is one of the tiniest companies ever recommended by Hidden Gems, but it doesn't mean to stay that way. The company aims to capitalize on the growth of satellite telecommunications by building the ground-based equipment necessary to broadcast and receive transmissions. Yet despite a business model that screams "high tech!" this little company boasts more than just "pro forma" profits. It's massively profitable in a real, free cash flow sense, generating nearly $10 million in cash over the past year and giving Radyne an enterprise value-to-free cash flow (EV/FCF) ratio of just 8.1.
Shoemaker Deckers (NASDAQ:DECK) has been kicked around by Mr. Market in recent weeks, making it the involuntary antidote for Fools who were wondering whether it's possible to buy a Hidden Gems pick at the recommended price. In Deckers' case, fears of rising inventories and slowing sales have put this stock on sale for 25% off September's recommendation price. Personally, I think the fears are overblown, and bought into Deckers myself for one simple reason: cash flow. The company's generated $17.4 million over the past 12 months. Analysts expect it to grow that at a 20% annual rate over the next five years. Yet after the recent price decline, you can now pick this one up for an EV/FCF of under 15 -- a fraction of the growth rate and a steal of a deal if the analysts prove right.
Speaking of which, today's news that the president of Deckers' underperforming Teva division has departed (been booted?) offers one more incentive for Fools who think a replacement might be just what's needed to revive that brand's fortunes.
Portfolio Recovery Associates (NASDAQ:PRAA). At The Motley Fool, we're usually not fond of debt. But in Portfolio Recovery's case, we'll make an exception. This little debt collector makes a boatload of cash by ... collecting boatloads of cash from debtors that other people have given up on. Over the past year, Portfolio Recovery generated $54 million in free cash flow against a market cap of just over $500 million. By my calculations, that makes this company second only to Radyne in sheer cheapness, boasting an EV/FCF/growth ratio of just 0.5 (compared to Radyne's 0.4) -- this despite the fact that Portfolio Recovery has risen nearly 50% since we first picked it.
And there you have it. Three classic recommendations that no one on Wall Street is watching. Same high quality as our new recommendations, and still priced to buy. Get 'em before they're hot.
Note: In the first edition of this article, we profiled the following three then-unloved Hidden Gems: CNS (NASDAQ:CNXS), Fresh Del Monte (NYSE:FDP), and Hooker Furniture (NASDAQ:HOFT). Since that article ran on Oct. 29, 2004, here's how they've fared:
CNS: +76.6%
Fresh Del Monte: +13.3%
Hooker Furniture: -36.0%
If you had made equal investments of $1,000 in each of the three companies named seven months ago, you would have netted a total profit of $539, or a combined rate of return of 18%. That's three times the market's 6% return over the same period of time. Sound good? Well, seven months is short-term, I know. We'll keep tracking.
In the meantime, sign up now for a free trial of Hidden Gems, so you can read our original write-ups on all the Hidden Gems named above -- and on several other terrific but undervalued small caps that didn't fit into this column. It's all yours just for giving us the chance to convince you of our service's value.
Fool contributor Rich Smith owns shares of Deckers and Hooker Furniture. The Motley Fool is investors writing for investors.
