Spin these names into your portfolio
In searching for an investment idea, these 2 stocks adhere to 3 specific appealing characteristics.
By Nick Kalivas
In searching for an investment idea, I was looking for companies with strong insider buying, an increase in institutional ownership and a short base. Why are these characteristics appealing? There are three simple answers:
1) Investors tend to feel confident when insiders are purchasing shares. Insiders should have knowledge of operational success, the outlook for profits, and insight into company morale. If insiders are buying, it suggests they are positive about future profitability and the potential for stock price appreciation.
2) Institutions usually do their homework and tend to think more strategically. They are not fly-by-night investors. Furthermore, they have greater access to company management than most retail investors. If institutions are buying, it should be a vote of confidence in the profit outlook.
3) A short base can fuel for a rally. Shorts have to cover their bets if the stock price continues to rise especially, or they risk unlimited losses . Bottom line, a short base is potential buying power, especially if a company starts to find upward price momentum.
Given this back drop, I ran a screen that looked for stocks with a short base over 25% of the float, a six-month change in insider ownership over 50% and an increase in institutional ownership over the past three months. Two stocks met the criteria: WhiteWave Foods (WWAV), Zacks rank #2 ("buy") and CST Brands (CST), Zacks rank #3 ("hold").
WhiteWave and CST are spin offs:
One of the surprising links between the two is that they are both relatively recent spin offs. WWAV was part of Dean Foods (DF), while CST was part of Valero (VLO). Academic literature has discussed the idea that spin offs create value and can outperform the market for as long as three years after the spin off date. CST began trading in April, while WWAV started trading in February. Both companies are early in their spin off state.
Looking at WhiteWave:
WWAV produces and markets plant-based foods and beverages, coffee creamers and beverages, and premium dairy products. The company has exposure to the U.S. and Europe and generated 10% sales growth in the U.S. and 13% sale growth in Europe in the last quarter. Guidance for the third quarter was slightly lowered compared to the consensus, but price reaction was positive with shares up on the day of the earnings release. Operational costs are expected to moderate and analysts seem to be looking for margins to expand as the company gets on its feet post the spin off.
The table displays a few valuation measures for WWAV. It looks expensive compared to its peer group on the basis of forward earnings, but relatively inexpensive to the Zacks consumer staples sector based on the price-to-sale and price-to-earnings-to growth rate ratio. WWAV offers a way to play the increased consumer focus on healthier and organic foods.
Looking at CST:
CST operates fuel stations and convenience stores with 1,900 locations in the southwest U.S. and eastern Canada. The company has a strong history of generating free cash flow, which jumped from $148 million in 2009 to $240 million in 2012. This equates to a 17.5% annualized growth rate.
CST has traded range bound since May. Technically, traders may reposition on a breach of what has been a $30.50 to $34.00 trading range.
CST has traded with a firm tone in recent sessions given poor profit results at its competitors. Travelcenters America (TA), Susser Holdings (SUSS) and Pantry (PTRY) reported weak results due to narrow gasoline margins. The table below displays the forward price-to-earnings ratio and expected earnings per share outlook for CST and its competitors.
CST is showing a price-to-earnings ratio on the higher side of the range and a slow estimated 2014 earnings per share growth rate. This may be a headwind to higher prices. However, the firm tone of the stock prices in the face of downward profit estimate revisions to the sector is curious and hints positioning may be lending support. Analysts cut the estimates of all these stocks -- PTRY, TA, SUSS and CST -- over the past 30 days.
Gasoline prices have eased in the last week, and refinery utilization rates have been over 90% in the past seven weeks. Furthermore, the days supply of gasoline was 24.8 in the week ending August 2 compared to 23.6 a year ago and looks comfortable. Determining the price of gasoline is tough, especially in hurricane season, but the combination of refinery activity and gasoline supplies may brighten the outlook for CST's margins. Flat to falling wholesale gasoline prices may give retailers like CST some ability to lift margins.
WWAV and CST offer investors the tailwind of institutional and insider interest. Earnings estimate revisions give WWAV a friendlier fundamental backdrop than CST, but a continuation of very current trends in the gasoline market may brighten the outlook for CST. WWAV would be the pick for more conservative investors, but CST is worth a look if you have an appetite for risk.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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