As Standard & Poor's gears up to prep the next group of
companies to join the S&P 500, investors are trying to game
the system by buyingstocks that have a strong chance of
graduating into this famousindex .
In the first part of this two-part series, I looked at a group
of companies that were solid candidates, according toCredit
Suisse, and also provided a look at the most impressive companies
in the S&P 400 mid-cap index. The top firms in that index
often matriculate to the S&P 500 when they reachmaturity
I took a close look at all of the companies that appeared in
the first part of this series, and there were some great
companies in the mix. If price were no object, I'd be a huge fan
, which is prospering form the ongoing trends toward undersea
naval warfare and undersea oil drilling. Oceaneering is poised
to grow at a sustained double-digit pace, which is something
few other defense contractors can say.
Cree (Nasdaq: CREE):
LED lighting is a revolutionary game-changer, and Cree'sheavy
emphasis on R&D is leading the charge towards ever-lower
prices for these low-energy light sources that also have
remarkable longevity compared to regular bulbs. Still,profit
margin gains may be tough in a very competitive
Polaris Industries (
recreational vehicles are suitable for retirees, Polaris has
become the go-to name for activity-oriented vehicles. Notably,
it has arevenue base that is four times larger than Winnebago
as well. If S&P wants to position for future demographic
trends, then Polaris is a great choice.
I love these companies, but I don't love theirstock prices,
and I'd prefer to wait for some sort of pullback before singing
their praises. That said, there are twoinvestment ideas that hold
great appeal on their own. If they get added to the S&P 500,
then they are also set up for a timely trade.
|1. HollyFrontier (
When oil refiners Holly Corp. and Frontier Oil decided to
merge in 2011, it was a match made in heaven. Both
companies had worked separately to greatly enhance their
abilities to process heavy crude oil, and the combined
entity is now the nation's leading refiner of this
difficult-to-process crude. Heavy crude always sells at a
discount to lightsweet crude , as most refiners would
rather work with the easier-to-refine crude.
Yet HollyFrontier's management has cracked the code, and
the company's state-of-the-art refineries take advantage of
the cheaper, heavier crude -- but they can turn it into
gasoline, diesel and other distillates at same price that
other firms require to process light sweet crude.
You can see the payoff from heavy spending on refinery
upgrades by looking at HFC's gross margins. They rose from
10% in 2008 to 11.5% in 2010 to more than 20% lastyear .
Marginswill likely fall a bit this year as crude oil prices
rise faster than distillate prices, but HFC's margins
should still be in the 15% to 20% range. And thatmargin
compression has caused this stock to fall more than 20%
since the end of winter.
Yet the sell-off has been a bit myopic. After all, the U.S.
is in the midst of an energy boom, and our domestic crude
oil, and the refined products that will ensue, are expected
to replace imported refined products. The key takeaway: HFC
and other refiners should see rising volumes in coming
years due to import displacement.
Meanwhile,shares are attractively priced at less than 10
times projected 2014 profits. And though the company's
stated formaldividend equates to 30 cents a share per
quarter, the company keeps delivering special one-time
dividends as well, and if you tally them up, the trailing
12-monthyield for this stock is 6%.
|2. Reinsurance Group of America (
I've been singing the praises of insurance stocks
throughout 2013, and though they have started to make solid
upward moves, they are still quiteundervalued . As long as
their balance sheets are worth more than the publicmarket
value of their stocks, then you should pounce.
This reinsurer (which insures the insurance companies
against catastrophic payouts) is a perfect example. At the
end of the second quarter, tangiblebook value stood at
$82.97 a share. That's roughly 24% above the current stock
price. And RGA is doing what any "below book" stock should
do: buying back shares. The current buyback will be fueled
by a $400 investment that should shrinkshares outstanding
by more than 5%.
Another plus: RGA has hiked its dividend by at least 25% in
2010, 2011 and again in 2012. And in early August, the
payout got another 25% boost. As I've noted before,
buybacks should take precedence over dividend hikes as long
as shares trade below book value, but attention to both
flanks never hurts.
Risks to Consider:
Possible inclusion in the S&P 500 should not be seen as
the solebasis for an investment in these firms, especially
considering that an invite may not come for another year or
Action to Take -->
Look for a quick 2% to 3% pop when any of these companies get the
invite to join the S&P 500. Both HollyFrontier and
Reinsurance Group of America hold great intrinsic appeal, even if
Standard & Poor's never comes knocking.
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.