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Building a Watchlist for Recovery



July 04, 2009 – Comments (4)

I was playing around with CAPS’ stock screener looking for dividend paying small caps by using the canned dividend setting and adjusting the market capitalization parameter down.  Many of the stocks returned were industrial, service, materials or other stocks with a cyclical business profile.  That got me thinking that maybe what I should really be looking for is a watchlist of stocks likely to do well as the economy gets stronger.

I’ve heard experts claim we should start seeing growth late this year, next year and further out.  I’m not smart enough to know when the economy will improve, so one criteria for this screen is the company must pay a dividend – I want to get paid while I wait.

I want companies that can survive if things continue to deteriorate and that have the resources to expand.  That means a strong balance sheet without a mountain of debt and some earnings over the past twelve months.  Many of the companies that fit this profile are capital intensive, so I was pretty liberal on the “without a mountain of debt” and ran the screen with a max debt-to-equity of 1.0.  Since small caps tend to outperform large caps in good times, I stayed with the small cap theme.

After a little tweaking, the screen returned 30 names with results by sector as follows:

4 – Basic Materials
1 – Conglomerate
3 – Consumer Goods
1 – Financial
2 – Healthcare
8 – Industrial Goods
9 – Services
2 – Technology

The next step in my screening process is to filter the list down to research candidates with a quick scan of the profile, key stats and earnings history on Yahoo Finance.  The same information is available from CAPS and other sources, it’s just that I’m familiar with the layout on Yahoo.  That narrowed the list down to ten names, shown in the table and briefly described below.

Symbol      Company Name                          LT Debt/Equity Ratio      Current Div. Yield %
WWW          Wolverine World Wide, Inc.                    0                                    2
LECO         Lincoln Electric Holdings Inc              0.09                                 3
PLPC          Preformed Line Products Co.              0.02                                 2
GRC           The Gorman-Rupp Company                  0                                    2
AIT               Applied Industrial Tech., Inc.              0.15                                 3.1
HWKN        Hawkins, Inc.                                           0                                      2.3
HWCC         Houston Wire & Cable Company        0.29                                 2.9
MSM           MSC Industrial Direct Co., Inc.             0.1                                   2.2
PRPX          Portec Rail Products, Inc.                     0.1                                   2.4
RAVN         Raven Industries, Incorporated             0                                     2.2

WWW – Footwear manufacturer and retailer.  As industrial or construction employment picks up, workers will need boots.  They do have some short-term debt, but the balance sheet is solid and the dividend is well covered.

LECO – Welding equipment and supplies.  This is 0ne of my existing CAPS picks,  the pitch is a little dated, but has more information on the company.

PLPC – Manufactures a variety of equipment used to protect and manage cable runs.  Very little debt and the dividend is well covered.

GRC – Pump manufacturer.  Any industrial activity that involves liquids needs pumps.  Very little debt and the dividend is well covered.

AIT – Distributor of bearings, fluid power equipment, tools, safety gear, and lots of other stuff used in industry or construction.  Low debt and the dividend is well covered.

HWKN – Chemical company.  This one popped up in a screen recently ran.  See my blog for more.  This is one of my CAPS picks and I own some.

HWCC – The name says it all - wire and cable.  Reasonable debt and well covered dividend.

MSM – Markets a wide range of industrial products.  You’re likely to see their catalog on the shelf next to McMaster-Carr’s and Grainger’s in many shops.

PRPX – Rail products.  When economic activity picks up, more stuff gets shipped.  In the meantime, investors get a decent dividend.

RAVN – I nearly scratched this one because I wasn’t looking for technology.  But, it has a very interesting mix of business operations.  GPS for agricultural irrigation systems, plastic sheeting, electronics manufacturing and high altitude aerostats among other things.  Yahoo shows a 100% payout ratio on this one, but the income and cash flow statements show is should be somewhere in the 25-30% range.

None of this should be considered a recommendation to buy or even pick one of these companies in CAPS.  A recovery could still be well off, but the time to start building a shopping list of recovery stocks is well before a recovery. 

I’ve probably excluded some good companies in narrowing the screen down, either because they were in a sector I’m already invested in (oil and gas), because I may have been too strict on the debt limit or just because I missed something.

And, I’m done researching for today.  It’s the 4th of July, the dog wants to go for a walk and I need to get the grill ready to cook up some burgers and dogs.

Fool on!


4 Comments – Post Your Own

#1) On July 04, 2009 at 4:51 PM, streetflame (29.29) wrote:

Interesting list and methodology.  However I would rather identify companies that obviously DON'T need US recovery to make record profits and increase dividends.  Things like Embotalladora Andina (AKO-A), PriceSmart (PSMT), and TurkCell (TKC).

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#2) On July 04, 2009 at 5:57 PM, ajm101 (< 20) wrote:

For what it's worth, my recovery bet is WAC.  They do high-touch service on a subprime morgtage porfolio.  They get good results now, but if the economy improves they could be a nice surprise if loans overperform.  As tough as it is (for me at least) to consider, there are probably a number of prospects in the financials in addition to industrials.

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#3) On July 05, 2009 at 2:26 AM, uclayoda87 (28.73) wrote:

Consider DELUXE CP as a marker of how other small businesses are doing.  It would seem that if demand for their products increased, then a broad range of other businesses would likely be improving and  DLX profits would also improve.


Deluxe Corporation provides various personalized printed products, promotional products, and merchandising materials to small businesses, financial institutions, and consumers in the United States and Canada.

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#4) On July 05, 2009 at 2:25 PM, rd80 (95.86) wrote:

 streetflame -  This screen started out as a search for small cap equity-income names.  The hits were mostly industrial, materials and business service type companies.  It seemed like a good idea shift focus, learn a little more about some of them and build a recovery shopping list, not necesarily a 'buy now' list.   I just looked at key stats for PSMT, it just missed coming up on this screen because of the current ratio limit I set.  TKC missed because the dividend was higher than I set.  AKO-A dividend is below the lower threshold I set.  The danger of using screens - set limits tight enough to keep the results managable and you exclude some good companies. 

ajm101 - I agree that there are probably a lot of good recovery stocks among the financials.  But, with all the distortion from gov't programs, mark-to-market, etc., I don't know how well a screener would do identifying good candidates.  FWIW, The one financial hit from this screen was Value Line (VALU) - I didn't even know they were public before this. 

uclayoda87 -  DLX is another one I didn't know was public.  I even get my checks from them.  With a nearly 8% yield and reasonable payout ratio it would pay to hold on and wait.  Also worth a closer look.

Many thanks for the comments and additional names.

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