To most investors, the name Thyra Zerhusen probably doesn't ring
While she doesn't get nearly the attention that some other star
fund managers get, Zerhusen has quietly compiled an impeccable
track record while heading the Aston/Optimum Mid-Cap Equity fund
since 1994. The fund has averaged returns of 8.37% over the past
ten years and 11.14% over the past 15 years, figures that blow away
the broader market and put the fund in the top 5% and 2% of its
class over those respective periods, according to Morningstar.
Just as she herself gets overlooked in the investment world,
Zerhusen's strategy targets the types of stocks that are often
overlooked by other investors. In a recent interview with
SmartMoney magazine, she said she keys on medium-sized companies
with market capitalizations between $1 billion and $12 billion.
While many investors key on small-cap upstarts or big blue chips,
such mid-sized firms, she said, are "largely ignored". Zerhusen
also tends to focus on companies with one or two business lines,
and which sell "must-have" services or products, according to
SmartMoney, which adds that she compares price/sales or
price/earnings ratios to a firm's growth to find bargains. Zerhusen
also seems to have a contrarian streak -- "your best ideas are
often when people think you are crazy," she said.
Like Zerhusen, several of my Guru Strategies (each of which is
based on the approach of a different investing great) key on stocks
that are being overlooked by investors for one reason or another.
While some target small-caps and others target very large stocks,
none of my models specifically key on mid-cap stocks (though many
don't limit their picks by size). Because of that I thought it
would be interesting to see which mid-cap plays my models are keen
on right now. I found a number that fit the bill. Here's a look at
some of the best of the bunch.
Emergency Medical Services Corporation (
This medical services firm operates ambulance services in 38 states
and the District of Columbia, and also provides emergency
department and facility-based physician services. The Greenwood
Village, Colo.-based company's services also include paramedic and
EMT training, physician education and training, and disaster
EMS ($2.3 billion market cap) is a favorite of my Peter Lynch-based
strategy. SmartMoney reported that one way Zerhusen finds bargains
is by comparing a firm's price/earnings ratio to its growth rate,
and the P/E/Growth ratio -- pioneered by Lynch -- is a key part of
my Lynch-based method. When we divide the firm's 19.6 P/E by its
44.8% long-term growth rate (using an average of the three- and
four-year EPS growth rates), we get a P/E/G of 0.44. That falls
into my Lynch-based model's best-case category (below 0.5). While
you shouldn't expect the firm to continue growing earnings at such
a high rate over the long haul, its P/E/G is low enough that it
still appears to be a good buy at this price.
EMS also appears to have manageable debt, with a 55.9% debt/equity
ratio, another reason my Lynch model likes it.
The J.M. Smucker Company (
Known for its jellies and jams, this $7.2 billion-market-cap firm's
major products also include coffee, peanut butter, shortening and
oils, canned milk and baking mixes. The Orrville, Ohio-based
company is another favorite of my Lynch-based model, which
considers it a "stalwart" because of its moderate 13.8% long-term
growth rate (based on an average of the three-, four-, and
five-year EPS growth rates) and multi-billion-dollar annual sales
For stalwarts, Lynch adjusted the "G" portion of the P/E/G to
include dividend yield. Thanks in part to its 2.7% yield, Smucker's
has a yield-adjusted 0.88 P/E/G, which comes in under the model's
1.0 upper limit -- a sign that it's a bargain. The firm also has a
solid 24.3% debt/equity ratio.
Reinsurance Group of America (
One of the largest life reinsurers in the world, RGA has more than
$2.4 trillion of life reinsurance in force and assets of $27.2
billion. The Chesterfield, Mo.-based firm has 27 offices around the
world, and a market cap of about $3.5 billion.
RGA gets approval from a model that is currently one of my most
selective -- the model I base on the writings of mutual fund great
John Neff. The Neff approach, which currently has strong interest
in just five stocks in the market, targets stocks with P/E ratios
that are between 40% and 60% of the market average; RGA's 7.32 P/E
falls into that range.
Neff also targeted stocks with consistent, moderate growth --
high-growth firms usually get a lot of attention and command high
price tags. The model I base on his writings thus looks for
companies with long-term EPS growth of between 7% and 20%. It also
likes to see that growth is driven by sales, not short-term,
unsustainable factors. With long-term EPS growth of 8% and
long-term sales growth of 11.3%, RGA passes both tests.
My Neff-based model also looks at the "total return/PE ratio", a
metric Neff developed that adds a stock's EPS growth and dividend
yield, and then divides the result by its P/E. RGA's total
return/PE is 1.23, more than twice the market average of 0.58, a
Varian Medical Systems, Inc. (
Based in Palo Alto, Calif., Varian ($7.2 billion market cap) makes
technologies that treat cancer and other conditions using
radiotherapy, radiosurgery, proton therapy, and brachytherapy. It
also makes X-Ray imaging tools used in medical and scientific
fields, as well as for screening cargo and industrial inspections.
Varian is a favorite of my Warren Buffett-based strategy. This
model looks for firms with lengthy histories of earnings growth,
manageable debt, and high returns on equity (which is a sign of the
"durable competitive advantage" Buffett is known to seek). Varian
delivers on all fronts. Its earnings per share have increased in
every year of the past decade; it has more than 20 times as much
annual earnings ($360 million) as debt ($17.9 million); and its
10-year average ROE is an impressive 24.4%.
C.H. Robinson Worldwide (
This Eden Prairie, Minn.-based transportation and logistics firm
has a market cap of about $11.3 billion, and has raked in about
$8.5 billion in sales in the past year. It has an excellent history
of growing earnings, having done so in each year of the past
decade. That's part of why it gets high marks from my Buffett-based
model. A couple more reasons: The firm has no long-term debt, and
it has averaged a 25.9% return on equity over the past ten years.
Robinson also gets approval from my James O'Shaughnessy-based
growth model, which targets firms that have upped EPS in each year
of the past five-year period. O'Shaughnessy used a key tandem of
variables when looking for growth stocks: a high relative strength
(which is a sign the stock is being embraced by Wall Street), and a
low price/sales ratio (a sign it hasn't gotten too pricey). With a
solid RS of 67 and a P/S ratio of 1.33, Robinson makes the grade.
Disclosure: I'm long SJM and RGA.