There's
Wall Street
, and then there's the "Wallflowers." These are companies that go
out of their way to avoid the Wall Street banking-and-research
mill, content to let their businesses speak for themselves. Some
companies end up as Wallflowers even if they prefer otherwise. They
have been simply unable to get analysts to pay attention to them,
perhaps because they don't have the financing needs that can
generate big fees for Wall Street banks.
You can also blame it on shrinking research departments in many
financial institutions. The big firms have sought to reduce the
number of companies they follow sharply, while a number of smaller
financial firms have gone out of business altogether.
To me, this just spells opportunity.
As these companies toil in anonymity, they are still seeking
ways to build sales and profits. Their
shares
may not reflect these efforts right now, but for the patient
investor, unrealized shareholder value gets unlocked, one way or
another.
Here are three Wallflowers worthy of further research.
1. NL Industries (NYSE:
NL
)
With a
market value
of almost $600 million and a consistent 50-cent annual
dividend
(good for a 4.2%
yield
), you would think this maker of various metal products would have
had at least some sort of following on Wall Street.
Well, this company's anonymity has been noted far away from Wall
Street, in Texas to be exact. That's the home of mega-investor
Harold Simmons, who has been quietly building an ever-larger
position in this company. Since mid-May, he has acquired another
20,000 shares and now controls more than 42 million shares, or
roughly 90% of the company's entire stock.
As is typical of many Wall Street Wallflowers, NL Industries has
little communication with the investment community, so analysts
don't have much of an idea about current business trends or
long-term goals. Interlocking relationships with other
Simmons-controlled ventures such as
Valhi (NYSE:
VHI
)
and
Kronos Worldwide (NYSE:
KRO
)
can also create a bit of work for investors to untangle. Still,
Simmons has an incentive to attract investor interest -- shares
have fallen from $18 a year ago to a recent $11.75, a level that is
too low, if Simmons' steeped up insider-buying is any
indication.
2. Ingles Markets (Nasdaq:
IMKTA
)
With roughly $3.5 billion in annual sales, this Wallflower has a
lot more heft than the lack of analyst interest may imply. To be
sure, the North Carolina-based grocery chain has seen
profit
margins pressured in the face of
Wal-Mart's (NYSE:
WMT
)
aggressive pricing moves.
Still, Ingles managed to deliver decent profit metrics, roughly
in the mid-pack of the field. It's unfair to compare this stock
with industry darling
Whole Foods (NYSE:
WFM
)
, which carries very rich valuations. It's also unfair to compare
it with industry
laggard
Supervalu (NYSE:
SVU
)
, which has seen its stock price crumble in the face of onerous
debt burdens. Perhaps a comparison with industry mid-tier player
Kroger (NYSE:
KR
)
is more apt.
Ingles, which is focused more closely on one region of the
country -- the Southeast -- appears to be the leaner operator. The
company's operating margins in 2011 were more than twice as high as
that of Kroger's. This may help explain why Ingles can afford to
pay a much juicier dividend than Kroger. Value investors may note
that Ingle's trades for less than tangible
book value
, a claim that Kroger can't come close to making.
Ingles is prepping to nearly double its warehouse capacity,
which should enable a wide range of goods that are currently
delivered by third-party vendors to be delivered in house. This
could help push margins even higher.
3. Key Tronic (Nasdaq:
KTCC
)
Contract manufacturing, which involves making products for other
companies, is a tough business. Just ask this company, which
typically makes due with operating margins in the mid single
digits.
Yet, even the toughest businesses can yield enough profits to
attract investors' attention. Thanks to a spate of new business
wins, Key Tronic is posting solid growth metrics. Sales in the
first nine months of fiscal (June) 2012 are up 33% to $96 million,
compared with the same period last year, while
earnings
per share hit 74 cents. For the full
fiscal year
, the company appears on track to exceed the 97 cents a share
earned back in fiscal 2006. (Actual fourth-quarter results are set
to be released on Aug. 21).
This is a clear case of a stock's anonymity pressuring its
value. The entire company trades right around tangible book value,
and for less than eight times likely fiscal 2012 profits. With
2,000 employees in plants spread across United States, Mexico and
China, Key Tronic appears to be faring well in a tough
economy
, and could really flourish when the global economy strengthens.
Risks to Consider:
As these companies tend to have limited communications with
analysts, quarterly results can sometimes be far from what is
expected. Make sure you research these stocks carefully.
Action to Take -->
These Wallflowers build their businesses away from the treadmill of
Wall Street's quarterly expectations. The key is to find them when
they slip to or fall below book value, as is the case with Ingles
and Key Tronic. Another suggestion is to wait until they're propped
up by other catalysts, such as significant insider buying, as is
the case with NL Industries.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.