Friday, February 1, 2008

HingeBull: Five More Outperformers

HingeBull is a selected list of stocks with the potential to outperform the market over the next 12 months. The earlier Five Smallcaps Primed to Soar article outlined five smaller stocks with excellent prospects. Despite the recent volatility in the markets, there are still stocks available with outstanding possibilities. The recent market churn improved the state of affairs by making many of these equities available at a discount.

These stocks were initially found using the HingeFire stock screener to search for stocks with solid balance sheets and price growth over the past year. Further comprehensive assessment revealed strong balance sheets, future growth outlooks, and associated stock price potential for these companies.

Five additional stocks rounds out the HingeBull list for a total of ten stocks. These additional stocks share the attribute that all are larger established companies rather than small caps. The firms are well positioned in industries which are growing; Agriculture, Insurance, and Medical. In many ways, all five of the companies below are under-valued compared to their growth potential over the upcoming twelve months.

  • AG (AGCO Corp.)
  • AOC (Aon Corp.)
  • BG (Bunge Ltd.)
  • ISRG (Intuitive Surgical Inc.)
  • MOS (Mosaic Co.)

It is not a mistake that three of the five stocks on the list are focused on global agriculture. This reflects the predominant view that world-wide commodities will out-perform over the next 12 months due to increasing demand for crops. AGCO, Bunge, and Mosaic are well positioned to take advantage of this growing market.

Over the upcoming weeks, a number of these stocks will be explored in detail. A brief overview of these five is provided below:

AGCO Corp (AG)

AGCO Corporation manufactures and distributes agricultural equipment and related replacement parts worldwide. The company's products include tractors, combines, self-propelled sprayers, hay tools, forage equipment, and implements, as well as a line of diesel engines. AGCO has benefited from the growth in both the agriculture industry and worldwide markets over the past year; trends that are expected to continue.

With a market cap of 5.73 B, the company has demonstrated solid revenue growth of over 30% per quarter (YoY). The 19.48 forward P/E ratio shows that the stock has solid value aspects, while the 1.36 PEG ratio demonstrates potential upside growth.

Aon Corp. (AOC)

In many ways, Aon Corp is a turn-around story. Three years ago, regulators from New York, Connecticut, and Illinois accused it and of cheating customers. Aon's stock plunged by more than a third, and its finances appeared to be weakening.

Gregory C. Case arrived as a turn-around CEO, and put the company back on track. Operating profit in 2007 is expected to come in at more than $945 million, up 26% from a year earlier, with revenue rising 10%, to $9.8 billion. With a market cap of over 12 billion, Aon is the largest U.S. insurance broker. The company was put together by string of over 400 acquisitions over time, and the current management team has taken steps to streamline operations and reduce overlap.

Bunge Ltd. (BG)

Some analysts view agriculture stocks as simply an ethanol play. However the ethanol market retracted in late 2007, while the market growth for firms still increased – driven by international demand.

Bunge operates in three agriculture segments; Agribusiness, Fertilizer, and Food Products. With a market cap of 15B the company still has room to growth with recent quarterly earnings and revenue growth (YoY) north of 80%. The P/E of 19 is still reasonable for a firm seeing a continuing upward curve in international agriculture sales.

Intuitive Surgical Inc. (ISRG)

Intuitive Surgical provides technology into a growing medical market. The company developed the da Vinci system for assisted, minimally invasive surgery, and has long been a popular story with investors.

ISRG sports lofty valuations with a forward P/E of 57. The company’s growth in both revenue and sales supports these expectations however. The company has no debt and solid margins to support its continuing growth.

Intuitive Surgical announced a 4th quarter earnings on January 31st. The quarterly profit more than doubled to $1.24 per share as compared to 62 cents per share from a year ago. The management team announced expectations for 40% growth in 2008. This drove the stock to open up 22% to $310 this morning.

Mosaic Co. (MOS)

Mosaic Corp is an agriculture play. The company engages in the production and marketing of crop nutrient and animal feed products worldwide. It operates in four segments: Phosphates, Potash, Offshore, and Nitrogen.

Mosaic has a 40 billion market cap and is a giant in the agriculture sector. The company has demonstrated stunning growth over the past year for a large company with expectations that the international market will continue to drive it into the upcoming year. The forward P/E of 15 is quite reasonable from a valuation perspective.

Summary

The companies outlined above represent more established value situations than the initial five small caps on HingeBull list. ISRG, of course, is more in the growth camp than a value candidate. Most fundamental analysts would view the other firms as properly valued rather than deeply valued; however the growth prospects over the next twelve months for these companies appears to be exceptional.

These larger companies round out the HingeBull list by providing an opportunity to diversify the entire portfolio with less speculative candidates; thereby reducing the overall Sharpe ratio and beta while still providing the potential for returns which outperform the market. As always, there are never any sure winners, but solid research can put the market edge in your corner.

Disclosure: The author does not have a position in any of the equities mentioned in this article. The information provided does not constitute a solicitation to buy, or an offer to sell securities.

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