Best of the Rest

Just ran 5K here in Switzerland.  Time wasn't great, but I ran the entire distance, which is good for me as I am an honorary member of the run 3 walk 2 club.  Listening to a little SRV on my JamBox, hotel windows open while eating a made in the USA granola bar. You can't get food like that in Switzerland (probably a good thing)!  I have watched the finale of season 1 in Homeland Security, so frankly I am only left with my blog to pass a slow Sunday.

I am going to go over another 10 companies or so on my watch list.  Please, please, please understand that I am not a financial analyst. In no way whatsoever are these recommendations to buy. I am not qualified to do that. But these my be starting points for your own due diligence.

So after Education stocks and Chinese stocks, I am coming down to the rest.  Gotta believe three or so picks will come from this list.  What am I looking for?  (1) solid balance sheet, (2) strong cash flow, (3) sustainable income and if all that falls into place, a company that might be a tempting takeover target.  I have no problem with ringing the register with a premium.

Here is list of stocks (from my recent top 200) that I am considering:

Ticker	Rank	Date	Stock Price	Market Cap	Earnings Yield	ROIC	Yahoo Yield	Country
KLIC	1	5/4	11.39	872	44%	111%	0.0%	USA
SIMO	2	5/4	11.45	387	26%	117%	1.4%	Taiwan
LPS	3	5/4	28.09	2,392	13%	265%	1.5%	USA
USNA	4	5/4	56.73	789	14%	171%	0.0%	USA
STX	5	5/4	41.23	15,214	17%	102%	3.2%	Ireland
RGR	6	5/4	51.07	1,011	13%	145%	3.0%	USA
XLS	7	5/4	11.25	2,132	24%	83%	3.8%	USA
NVDA	8	5/4	13.87	8,627	14%	105%	1.1%	USA
EXPR	9	5/4	18.63	1,590	16%	90%	0.0%	USA
SAI	10	5/4	14.91	4,995	15%	98%	3.3%	USA
CA	11	5/4	27.73	12,562	10%	407%	3.7%	USA
AVG	12	5/4	16.83	919	10%	778%	0.0%	Netherlands
CF	13	5/4	184.00	11,702	25%	72%	0.9%	USA
UTHR	14	5/4	65.81	3,447	14%	93%	0.0%	USA

Note the rankings are a relative ranking, not where they stand in my top 200.  As I have 14 stocks, I will probably make this a 3 part series.

KLIC - I think these guys are at the top for a reason.  When I did the math, I frankly could not believe it.  This is a company with a market cap of $872m and by my math they have almost $500 in excess cash.  What does that mean?  That means they could theoretically pay a $5 dividend per share and still have the same earnings stream going forward.  They make the equipment to allow companies to make semi conductors.   Over the past three years, their operating income has gone from 150m to 182m.  Did I mention their market cap was only 872m and they have 500m of excess cash.  Think about it,  if you had $1b, you could (theoretically buy all their stock)... say $13 a share.  You could immediately pay yourself a $5 per share dividend.  Now you are only $8 per share out of pocket.  Over the past three years they have average $2 per share in income.  That is a 25% return per year on your $8.  Pretty good, no? But we do not have to pay that premium, as small time investors, we can buy as much as we want for $11.39 a share.  Then we wait for the big guys to figure it out.  Now I know it is not that simple.  There is a reason for the discount.  They are only expected to earn 77 cents this year and 1.45 nect year.  There is a cycle in CapEx spending.  But when that spending starts to ramp back up, you would be sitting in proverbial catbird seat.

SIMO - Ok, I have never heard of this company. So I think we need to be extra careful.  Well, I can tell you I am already interested.  In February they instituted a 15 cent quarterly dividend.  That is over 5% a year my friends, and you know I am interested in MFI stocks with decent yields. On the Income Statement side, they have doubled revenues since 2010 from 143m to 281m.  That has diven earnings in 2012 of $1.40 a share (all in).  They announced earnings on April 25th.  Initially the stock dropped, but has recovered.  One of the issues with these smaller firms is they can be overly reliant on one or two customers. Hmm, they made 17 cents a share on 57m in revenues.  That is a pretty big drop from a year ago, when revenues were 64m and they made 39 cents. Well, reading through everything, it seems they have a product people do not want as much.  Here is a quote:

"Our business is rapidly transitioning from our traditional card and USB flash controller products to SSD plus embedded products. As we further transition our business towards SSD plus embedded products this year, we believe the non-LTE part of our business, which is approximately 85% of our sales last year, should grow in the range of 0 to 10% this year. For the second quarter, we expect sales of our non-LTE products in aggregate to grow 10 to 20% sequentially. Our LTE products are moving to next-generation solutions and until design wins are secured, we are unable to provide revenue targets. At a minimum though, we believe we can achieve $15 million in LTE revenue in 2013."

That looks like something I would stay away from "business transitioning" and "until we get design wins".  Next.

LPS - I know they do not pass my balance sheet test with over $1b in long term debt.  But I own then in a previous tranche and I do think they are in a segment that has good growth potential.  Hmm, I am already seeing a problem as I look at their balance sheet.  They have $2.5b of assets and $1.9b of liabilities, so that should be ok.  But the quality of assets leaves something to be desired. They have $1.1b of their assets in goodwill. Blech. Can't spend or sell goodwill.  If you back that out, they are actually in a negative equity position.  Next.

USNA - Up a very "netflix-like" 72% so far in 2013.  Does that mean we are too late?  I don't know, they still score very high.  Let us see if they have decent earnings power going forward. Looking back, it seems that the reason for the out-sized increase in 2013 was due to a cliff at the end of 2012.  They traded around $50 a lot last year and now are almost $57.  So if that increase is due to earnings growth, we can feel better.  BTW, the huge plunge was largely due to USNA getting caught in the HLF cross fire when Ackman put out his anti-MLM powe-rpoint manifesto (Ackman).  USNA is almost $800 market cap. They have $64m of excess cash. Operating income is marching up nicely in past three years: 78/86/107m. 1st quarter looks strong with revenues up about 10% (USANA Health Sciences Announces Record First Quarter Financial Results). Interesting, they have lowered share count in past year from 15.3m shares to 13.9m.  That is impressive. They expect to earn between 5.25 and 5.40 per share in 2013.   That compares to $4.45 last year.  20% earnings growth is very sweet, and compounded can make us as owners quite wealthy.  I certainly do not see a reason not buy this stock, unless you are fearful of some fallout should state attorneys general take the bait on HLF and investigate practices over entire industry.  Frankly, that fear might be enough to keep me on sidelines.  I already have NUS. And USNA is not expensive, but not as cheap as some others on my lists.

STX - I think the obituary has been written on this company many times.  While in some cases, technology does come along and render a company or industry obsolete (think Yellow Pages or Record Stores); many times the effect is greatly exaggerated (think GME, which has almost doubled from lows in 2012 or HR Block, which is also up hugely).  Seagate of course makes disk drives.  Computer sales are down and even the ones happening, there is a move to solid state drives (they are very snappy). But to the good, people still will need computers.  One or two competitors have dropped out. And STX is much more than disk drive.  In the past nine months, the amount of storage they have shipped has increased 33%.  Now I know it is cheaper and disk drive are holding more, but this does not sound like an industry on it's deathbed.  Also, they are a player in the SSD market and have options with 500 gb and one TB storage.  Those undoubtedly have higher margins than hard drives.  Let us look at a few financials, now that we have cast doubt on the rumors of STX going the way of the do-do bird.

Operating income for the year ending 6/30/12 was a nudge over $3b.  That is most excellent. 2011 was 822m.  I think you average the two as you had floods in Thailand cause a real shortage of hard drives and call it $1.9b. 2010 was 1.86b. Now this is a company with a $15b market cap.  So operating income of $2b+ is pretty decent.  In the past three quarters they have made $2.3b in operating income.  So perhaps that $3b in 2012 is the more real run rate. Per my math, they have about $2b of excess cash.  Toss in a 3.7% dividend and I am wondering why I did not jump on this stock in February when it was $34 instead of $41.  Hmmm, I will say I am getting a list of stocks I think I will be pleased with.  STX will certainly make the next cut.

Think I will will write more later.  Tschuss!