Building a sizable retirement nest egg requires a great deal of
is expanding, you need to dig deep for the best growth stocks.
These are the names that can see their price-to-earnings (P/E)
multiples expand to very lofty heights as investors extrapolate
robust growth rates for several years. But this hasn't been the
case in 2011. The economy has muddled along at a tepid growth rate,
and may not build a head of steam until later in 2012 or perhaps in
2013. While this lasts, your investment focus needs to retain
a defensive posture as capital preservation becomes just as
That's why, throughout the year, I've been focusing on companies
that sport very strong balance sheets. Any time you can find a
company with a
that is well lower than the
sported on the
, you can sleep better at night.
I put together a list of stocks trading for less than 80% of
. Each is expected to post full-year profits in 2011 and 2012, so
book value is likely to rise even higher from here. Let's take a
Rebuilding a tattered reputation
Whenever you see a stock trading at just 39% of tangible book
value, it certainly catches your eye, but you know there has to be
a catch. And when it comes to
TravelCenters of America (NYSE:
, which operates more than 200 truck stops across North America,
there are a pair of them.
First, the company was saddled with very expensive leases from its
Hospitality Properties Trust (NYSE:
, which owns the underlying
and facilities at each truck stop. This explains why the company
lost a collective $300 million from 2007 to 2010.
Second, management, aided by a too-friendly board of directors, has
been lavished with too much compensation, according to some on Wall
Street. It's unclear what steps the company is taking to improve
its corporate governance (and hence its reputation on Wall Street),
is now markedly healthier, since TravelCenters was able to
renegotiate much better lease terms from HPT. Citigroup estimates
the company would have lost $5 million in 2010 if these lease terms
had been in effect last year, instead of the $65 million actual
Better still, the lower lease costs, coupled with an
in traffic, are putting TravelCenters on a path to finally make
money in 2011. Analysts anticipate
earnings per share (
hitting $0.67 this year, and look for a 20% jump in 2012 to $0.81,
simply based on recent operating trends. Per-share profits could
get a boost in 2013 as well, because the company is in pursuit of
existing truck stops to acquire. According to management, every new
site that is purchased adds roughly $0.02 to
. These gains largely come from increased usage of the company's
Fuel Card, earning the company roughly $4 in extra
for each gas tank that gets filled up, as funds don't need to be
remitted to the major
Citigroup's Susan Anderson says
are worth around six times projected 2012
, or $8. That's nearly 100% upside from current levels. And this
target price is still below the $11 per share in tangible book
value. It may take a few quarters for this trade to work, though.
TravelCenters may still lose money in the December and March
quarters, and the stock may only really respond when an expected
bulge in profits arrives in the June quarter.
Ready for rough seas
It's no secret European consumers may not be spending much money on
leisure in 2012. Luckily for
Royal Caribbean Cruises (NYSE:
, the region represents less than 10% of revenue (compared with 45%
Carnival Cruise Lines (NYSE:
). Still, this has been cold comfort to Royal Caribbean investors,
who have seen the stock fall nearly 50% this year, compared with a
30% loss for Carnival.
Investors are right in shunning all cruise line stocks. The
industry has been so focused on
that profits have taken a back seat. Adding a lot more new ships to
the mix each year has led to price wars and weak profit margins.
But that's about to change, according to Goldman Sachs. Their
analysts are "increasingly optimistic that cruise operators are
shifting their focus to enhancing existing hardware and improving
'same ship' profits, and away from building new ships." To boost
the profitability of each voyage, Carnival and Royal are adding a
wide range of new amenities that are already boosting the amount of
money passengers spend onboard. "This shift to 'same store' from
'more stores' could be a structural change and could reverse the
decade-long decline in
(return on invested capital)," according to Goldman.
It may take some time for the industry discipline to pay off.
Analysts expect EPS for Royal to rise roughly 13% in 2012 to about
$3.10, but it may be wiser to assume profits stay stuck around
$2.75 for a while (as will likely be the case in 2011) in case the
global economy remains challenged. At this price, however, the
stock is still inexpensive at less than 10 times projected profits.
More to the point, the cruise line operator's fleet of ships is now
being undervalued, as the company is trading at just $0.70 on the
dollar in terms of tangible book value. If recent improving
employment trends can be sustained and Royal Caribbean is able to
meet the current 2012 EPS forecasts, then that P/E multiple may
expand up to the 12-13 range, implying a stock price move up from
the mid $20s into the low to mid-$30s (which would still be below
the stock's book value per share).
Risks to Consider:
These below-book stocks typically lack near-term catalysts and
are unlikely to move higher until the broader
does. Given the current global economy, it may take a few quarters
before any upward price movement happens.
Action to Take -->
The approach you need to take to these stocks is my preferred
method of investing -- especially in this market. The key here is
the opportunity to capture decent upside in these names -- likely
in tandem with the broader market -- while having more
clearly-defined downside protection, since they already trade below
TravelCenters and Royal Caribbean are out of favor at the
moment, but are taking steps to improve their long-term
profitability. These are my two favorite picks from the results of
my screen. But you may want to look into other names in the list to
see if you find a different opportunity to profit as
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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