Three Dirt-Cheap Growth Stocks - 103011 views

By Stockpickr Guest Columnist Glen Bradford

It is my belief, as well as the belief of Peter Lynch, that stocks drop twice as fast as they rise. Loss is painful -- I'd say about twice as painful as gain is pleasurable in matters financial.

But here are three companies in different industries that fundamentally stand strong and, if trends hold true, should stand stronger.

Middleby (MIDD): Middleby deals mostly behind the scenes in the commercial food service industry. Its P/E ratio comes in at 15.4, implying that it's going to grow at about 8% over the next several years. This is market average. Over the last couple of years, Middleby has been growing at 24%, a fairly predictable level. By those measurements, the last four quarters have outperformed what I anticipated. When I shorten the time frame to three years, I come up with a growth rate near 30%.

I'm not sure why Middleby is trading as cheaply as it is. It seems as if it's acquiring companies right and left. Normally, you'd be worried about the goodwill figures on its balance sheet, but they are increasing relatively proportionally with net income. Middleby's return on equity is 36%, which is huge, and it looks as if Middleby is using much of this profit to acquire other companies within their industry to keep its competitive advantage, the strategy of great management.

Middleby just bought TurboChef. TurboChef makes the neat tornado ovens that Subway uses to cook its sandwiches. So what you have is a predictable company making lots of money for its investors, acquiring other companies and trading at a discount. It's a buy for under $60.

The Andersons (ANDE): The Andersons deals mostly with Midwest transportation and agriculture. It recently raised its full-year 2008 earnings expectations to about $5. I have its third- and fourth-quarter EPS at 81 cents and $1.11 based on historically seasonal fundamental analysis. That said, these are underestimates of what I expect.

The most-recent quarter illustrated explosive growth. If you neglect the last year of abnormal growth, this company has been growing revenues at 12% annually. A P/E ratio of 7.3 warrants a future growth rate of 3%, which is far below what The Andersons has historically achieved and far below what analysts expect.

This company is strong in its 2nd and 4th quarters and weak in its 1st and 3rd quarters. Although this next quarter is 'weak,' this year is strong and in my opinion so is the future for The Andersons, Inc. A buy for me until $50.

Nasdaq OMX Group (NDAQ): What used to be known as the Nasdaq Stock Market is constantly pushing new limits and supporting more market operations. Renamed in February as the Nasdaq OMX Group, this company has recently begun selling real-time quotes. Historically, I'm looking at 50% growth year over year, with a high level of predictability.

According to Google, Yahoo! and other financial websites, Nasdaq's P/E ratio is around 7.68, implying that the annual EPS is $4.10. I, however, have the annual EPS at $1.84, leaving a P/E ratio of 17.5 -- still far short of where it should be. Not sure what's going on here, but it's entertaining, to say the least.

Another good signal is that 30% of this company is held by insiders and the rest is mostly held by institutions. Whichever P/E ratio you're using to value this company, it's still underpriced, and it's a buy for me up to $63.

These are just a few companies paying for my graduate school education at Purdue. I'm not planning on writing bullish articles on companies that I don't own. Does something like that even make sense? To tell others to buy something that you yourself don't already own is misleading.

I own MIDD, ANDE, NDAQ.

Posted on Aug. 24, 2008

By:bradford86

Date: 08/27/08

Good Catch, see www.glenbradford.com/blog for the link to the picture. or www.glenbradford.com/files/Stocks/ndaq1time.jpg but here's what I wrote:

Hey jkosinsky,

I looked into it. NDAQ is one of those stocks that's difficult to look into because when you search the ticker, it loads up bunches and bunches of trivial information that I really could care less about, such as who is ringing the opening bell, etc. I try to keep very little tabs on this one. Here's an article that I think refers to what you were pointing out: http://seekingalpha.com/article/26885-nasdaq-triples-earnings-on-one-time-charge-eps-in-line

Alright. I looked at it. There was a huge increase in the EPS. Yeah, looks like you're right. The good news is that it doesn't change my opinion on the company. It looks like a lot of the sites I reference quickly like http://investing.businessweek.com/ take out these one-time issues so that their data is more linear too. Good Catch. If you look at the picture for this article, you're right. That clears it up for me. Thanks!

Glen

By:jkosinsky

Date: 08/27/08

Comment continued:
NDAQ one time annual reduction of P/E from sale of LSE.
Please reply.
JK

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