by Lawrence Meyers | April 4, 2013 9:40 am
Occasionally, the market discounts great stocks for no good reason. And that’s the time to scoop up great operating companies at a discount — either to flip for a nice return when the stock inevitably bounces back, or to hold for the long haul.
Here’s a look at four such stocks that investors should be eyeballing as bargain buys:
Sturm, Ruger (NYSE:RGR[1]) is getting hammered over anxieties concerning gun control legislation. I understand that investors are concerned about risk, but this concern is overblown.
At the federal level, no meaningful legislation will pass with the GOP in control of the House — it’s all about public relations and looking good. The states are ramming some unreasonable legislation through, but guess what? There’s this little thing called the Second Amendment, and it’s taken very seriously by a lot of people in this country, not the least of which is the NRA. You can bet that every single law that is in any way restrictive will be challenged by the NRA.
While nobody can predict the ultimate resolution of any of these cases, every credible constitutional scholar has predicted that any legislation that would materially affect the manufacture and sale of guns will be defeated.
Meanwhile, Sturm, Ruger has been tearing through estimates, and its business is on fire as everyone races to stock up on guns for fear they’ll be taken off the market. RGR is 21% off its 52-week high, it has tons of cash and pays a 3.2% yield. Buy it here.
Francesca’s (NASDAQ:FRAN[2]) just reported blowout earnings[3], as its same-store sales numbers remain strong, and the company generates solid cash flow amidst its successful aggressive expansion program.
However, a private equity stakeholder who bought into the company pre-IPO has sold off its entire stake in a private transaction. Investors mistakenly believe this to mean that the PE firm has lost faith in the retailer. In fact, it’s what PE firms do. They buy into a great company in the early stages, sell out for multiples of their investment after the IPO, then reinvest that capital into another small company. As a result, Francesca’s stock has given back what its great earnings provided.
However, FRAN is growing at 25% annually and is 24% off its high. Let recent pain be your gain.
Expedia (NASDAQ:EXPE[4]) is 15% off its 52-week high on no discernible news. Leisure and business travel is as strong as ever. Meanwhile, Expedia generates a billion dollars a year in free cash flow, is growing at 14% annually, sits on a billion dollars in net cash ($8 per share) and is one of the premier online travel booking names. This is a no-brainer.
EZCorp (NASDAQ:EZPW[5]) is sagging over items totally unrelated to its business. Its competitor, DFC Global (NASDAQ:DLLR[6]) warned of a big earnings hit from its U.K. operations[7], yet EZ isn’t meaningfully exposed in the U.K. Legislation under consideration in Texas, EZ’s big payday loan market, will have no material impact on the company is passed, and payday itself now represents a small percentage of its revenue.
Meanwhile, EZCorp has purchased a phenomenally profitable domestic online lender and will scale it internationally, while seeing accretive effects from other recent acquisitions. This 15% growth play is literally selling at 7.5x earnings, or at a screaming 50% discount.
As of this writing, Lawrence Meyers was long FRAN and EZPW and sold naked put positions on RGR and EXPE. He is president of PDL Capital, Inc.[8], which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books[9] and blogs about public policy, journalistic integrity, popular culture, and world affairs[10]. Contact him at pdlcapital66@gmail.com[11] and follow his tweets @ichabodscranium.
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