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Finding stocks with value and momentum

Not all gentlemen prefer blondes. And not all investors prefer stocks that are going up. But many do. For them, twice a year, I try to identify stocks that display both value and momentum.

With market indices showing a negative return so far this year, momentum is getting harder to find. And after a big market advance last year, value is getting scarcer, as well.

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But it’s still possible to find both. In this column, I will suggest four stocks that I think fit the bill.

On average, my “value plus momentum” choices have returned 20.06 percent over 12 months, including reinvested dividends. On the same basis, the S&P index has returned an average of 6.92 percent.

The list from a year ago did well. It was up 33.64 percent including dividends, compared to 20.28 percent for the S&P 500 from Feb. 5, 2013, through Jan. 31, 2014.

That performance was driven by Western Digital Corp., which returned more than 87 percent. I owned Western Digital for almost all my clients a year ago. Today, I have been reducing the size of my holdings because the stock has gotten more expensive.

Oshkosh — We’ll lead off with Oshkosh Corp., a stock I have owned in the past, but don’t own currently. Based in Oshkosh, Wis., the company makes aerial lift platforms, fire engines, garbage trucks, snowplowing vehicles, and military supply transport vehicles.

The problem for Oshkosh is that many of its customers are cities, counties, states, and the federal government, all of which are on tight budgets. Earnings have been uneven. The company is trying to reduce military revenue as a percentage of the total, and emphasize its civilian businesses.

I believe states and municipalities will improve their budgets over the next two to three years, allowing them to satisfy pent-up demand for fire engines, garbage trucks, and so on. The valuation ratios of 14 times earnings, 0.6 times revenue and 2 times book value put Oshkosh in the value range. As for momentum, the stock has risen this year in a declining market.

Engility Unlike Oshkosh, Engility Holdings Inc. is not trying to reduce its dependence on federal contracts. As a consultant to various parts of the US military, this Chantilly, Va., company is in bed with Uncle Sam and always will be.

Spun off from L-3 Communications in July 2012, Engility provides technical services, training, and program management and engineering services to military and homeland security customers. It has about 1,300 contracts, no one of which accounts for as much as 10 percent of revenue.

In an era of constrained military spending, Engility shares fetch a modest 8 times earnings and 0.5 times revenue.

Nordion Nordion Inc., from Ottawa, makes radioactive isotopes used to diagnose and treat various types of cancer, and equipment to sterilize medical devices.

Its earnings history is uneven, but the company has staying power. It has been around since 1946, and has debt equivalent to only 8 percent of stockholders’ equity.

The shares have risen this year on speculation about a takeover or restructuring. I find the shares reasonably valued at 1.3 times book value.

Allied Nevada Most speculatively, I like Allied Nevada Gold Corp., which rose 38 percent in January.

Since this is a penny stock, it is prone to rapid and violent swings. As with Nordion, I believe takeover speculators are helping to push the price. With Allied Nevada, I think a takeover is even more likely than it is with Nordion — though the only actual offer made public recently, from a little-known Chinese company, was quickly withdrawn.

At 0.6 times book value, I view Allied Nevada as a worthwhile speculation.

John Dorfman is chairman
of Thunderstorm Capital
and a syndicated columnist.
He can be reached at jdorfman@thunderstorm
capital.com
.
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