Some companies are obviously great investments -- in hindsight. Yet for every stock out there screaming "buy me," others simply give us a nudge and a nod. How can we tell tomorrow's obviously great investments from the thousands of pretenders?
The stars' walk of fame
In its first 20 months, stocks achieving five-star ratings on Motley Fool CAPS outperformed the market by 12 percentage points. Newly minted five-star stocks represent your best opportunity to capture those returns. So let's sift through the proprietary ratings system and find those stocks heading toward five-star superstardom. Here are a handful of four-star firms approaching greatness:
- Jos. A. Bank Clothiers (NASDAQ:JOSB)
- Legg Mason (NYSE:LM)
- Tesoro (NYSE:TSO)
- Sherwin-Williams (NYSE:SHW)
- TeleCommunication Systems (NASDAQ:TSYS)
Some of these names might surprise you. Until a recent string of underperformance, legendary investor Bill Miller has guided Motley Fool Inside Value recommendation Legg Mason to 15 straight years of beating the market. Almost great? Even familiar names can still offer some of the best opportunities. Perhaps we've just forgotten the potential they still hold. However, the 115,000-plus CAPS investors chose these companies as less obvious sources for tomorrow's great buys; let's see why they might merit your attention.
Welcome to the future
A series of government contract wins for TeleCommunication Systems has the potential to launch the secure wireless communications provider into the stratosphere. While the bulk of its revenue comes from providing services like Enhanced 911 to dozens of wireless carriers -- Verizon (NYSE:VZ) alone accounted for 20% of 2007 revenue -- the company gets more than one-third of its sales from the government. The U.S. Army recently awarded TCS a 39-month, $246 million contract to deploy highly secure satellite communication access to broadband satellite services.
That contract is just the latest in a series of wins for TCS, which has strung together four straight quarters of positive earnings -- a first since it went public. By jettisoning two unprofitable lines of business, which respectively sold BlackBerry services and provided real-time financial market data to wireless-device users, TCS could have clear skies to soar toward further profitability.
Investors are beginning to take notice. Top-rated All-Star CAPS member EnigmaDude thinks the military contracts validate a higher valuation, arguing that TeleCommunication Systems is "on a tear with new $240m Army contract, insider buying, not much analyst coverage yet."
A take on a classic
Trends in men's fashion change at a glacial pace. That bodes well for nattily dressed Jos. A. Bank; though it's been suffering lately from the recession, job interviewees still know they need to dress for success. That may explain why sales for the latest quarter bounded 12% higher, while profits also rose 18%, well ahead of analyst expectations.
While shares peaked in June following the earnings report, they dropped more than 25% over the next month or so, as short interest in Jos. A. Bank shares soared to 84% of shares outstanding. Rival Men's Wearhouse (NYSE:MW) lowered its outlook for the second-quarter earnings it will report later this month, but that was based on conditions related to its own business: a big severance payout and lower tuxedo rentals.
As a result, Jos. A. Bank may have a short squeeze in the making. Shares have bounced almost 20% higher in just the past few trading days. CAPS member uncch08 thinks this stock is a hidden jewel among the discount racks:
At a $400M market cap, Jos. A Bank trades at roughly 1.5x tangible book value. Back that out of present value and you're looking at a company that trades at 2x operating cash flow. That's cheap and provides a nice safety cushion. This company is often billed as being highly discretionary, but they've become a "Perma-Sale" company. High end prices, always on sale. When buying work clothes, men typically won't scrape the bottom of the barrel and [Jos. A. Bank] could actually see an increase as some high end consumers scale down from higher luxury brands. It's simply not that discretionary.
To top it all off, [Jos. A. Bank] isn't widely covered by Wall Street analysts. That can be a key indicator of something that The Street is missing. This company has also produced consistent ROE of over 21% and double digit revenue growth in each of the past 5 years.
A great opportunity for you
These four-star investments may be on their way to five-star greatness. To start your own research on these or thousands of other stocks, join us on Motley Fool CAPS. You can read a company's financial reports, scrutinize key data and charts, and examine the comments your fellow investors have made, all from a stock's CAPS page.
Sign up today for the completely free service, and let us hear what you have to say about the great and almost-great companies that interest you.
