Taking stock in value and potential

The North Carolina doughnut maker’s stock is a good value at six times earnings.
Daniel Barry/Bloomberg News/File 2006
The North Carolina doughnut maker’s stock is a good value at six times earnings.

“Why don’t we wait to buy this stock,” a colleague asked, “until it has finished going down?”

We were in an investment committee meeting some years ago. My colleague’s view didn’t prevail, since most of us believed that turning points can only be recognized in hindsight. We bought the stock, and it went down some more before it began to pay off.

My colleague’s question echoes the feeling of many investors. They like to buy a stock when they see value, but also when they see some evidence the stock is rising.


I will buy a stock whether it is rising or falling. But I know that many readers agree with my former colleague. So about twice a year, I devote columns to stocks that exhibit both value and momentum.

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On average, the stocks on my Value-Plus-Momentum lists have gained 18.3 percent, while the S&P 500 has averaged 5.6 percent. The figures are total returns, including dividends.

So what stocks show momentum now, and good value characteristics?

Krispy Kreme Doughnuts Inc. has jumped from a little more than $6 a share last summer to almost $13, partly on takeover speculation. I think this doughnut maker would be a tasty bite for an acquirer. But even if that doesn’t happen, the stock is still a good value at six times earnings. I’m not entirely objective: CEO Jim Morgan is a friend.

Next is Western Digital Corp., a maker of computer hard drives whose shares have zigzagged wildly in the past year. Its 2012 earnings of more than $8 a share were better than double the total of the year before. The stock sells for only five times earnings. I think investors accord it such a low multiple because they believe disk drives will become obsolete. I believe that will take a long time. I own the stock for almost all of my clients.


Up about 33 percent in the past two months is FreightCar America Inc., which specializes in coal-carrying cars, especially aluminum ones. A low price for natural gas in the past couple of years has hurt demand for coal. Now the gas glut is beginning to ease, and coal is beginning to make a comeback. I think this bodes well for FreightCar America, which is debt-free and selling for 11 times earnings.

Marathon Petroleum Corp. is a large refiner spun off from Marathon Oil Corp. in 2011. Marathon had an excellent 2012.

The number of miles Americans drive is an important influence; mileage rose steadily for 20 years until 2007. Since then the trend has been mostly down, but there was an uptick ­— and perhaps a trend reversal — in 2012. Although Marathon was up about 43 percent in the past two months, it still sells for a reasonable multiple, eight times earnings.

John Dorfman is chairman of Thunderstorm Capital in Boston. His firm or clients may own or trade securities discussed in this column.