Glancing at my watch list today, I noticed that the normally sleepy manufacturer Sun Hydraulics (NASDAQ:SNHY) is up an impressive 6.5%. You can only imagine my disappointment that the news moving the shares is a 3:2 stock split.
That's not to say that Sun Hydraulics isn't an interesting company -- at a high level, it definitely is. Like many potential Hidden Gems in the market, Sun Hydraulics sports some impressive financials and operates in an industry unlikely to attract a lot of attention. Hydraulics isn't exactly the hot new thing, but it's a profitable niche for Sun, and the company plans to expand its reach geographically.
For investors, news of a stock split isn't particularly exciting. Sure, management apparently believes that the future looks bright, but it doesn't much matter to shareholders whether Sun's pie is divided into eight pieces or four. The company's strong free cash flow, focus on hydraulics, and high level of insider ownership are the factors that really count.
Sun Hydraulics may have larger competitors such as Textron (NYSE:TXT) and Sauer Danfoss (NYSE:SHS) to tangle with. But both have other businesses to tend to, while Sun can focus strictly on hydraulics. Companies with a clear focus tend to perform better.
Another favorite trait of Hidden Gems investments is a high level of insider ownership, especially if the owners are managers or founders with a large enough stake to be keenly interested in the success of the business, but not large enough drown other investors out. Sun Hydraulics' founder owns 36% of the company's shares. Sun also sports double-digit returns on assets and equity.
The only hangup on Sun Hydraulics is that it lacks a margin of safety at today's prices. At $36 per stub, investors have priced in the strong free cash flow and given the company a fair valuation at 17 times next year's earnings. For now, Sun Hydraulics stays on my watch list, but not yet in my portfolio.
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Nathan Parmelee has no financial interest in any of the companies mentioned. You can view his profile here. The Motley Fool has an ironclad disclosure policy.
