by Hilary Kramer | October 23, 2013 2:00 pm
At the start of each quarter, I like to calling out a list of five names that are particularly attractive buys for the quarter ahead. As always, remember that it’s important to spread your money out and not invest everything in just one or two of the companies, which will help limit your risk exposure.
So without any further ado, let’s take a look at the list:
Dice Holdings (DHX[1]) is our newest Breakout stock, and I believe this specialized career website company should see a continued earnings recovery as the labor markets tighten and the global economy improves. DHX’s websites concentrate on positions in technology, finance and energy, and have gained a loyal following from both job seekers and providers in those fields. With management already guiding to lower results for the remainder of the year, a lot of risk has been taken out of the shares, and I look for the company’s new CEO to move forward on new growth initiatives, such as international technology recruiting.
Lionbridge Technologies (LIOX[2]) provides translation services to some of the world’s leading companies, and is another potential beneficiary of an improving global economy. Management was very upbeat following their most recent earnings report, citing improved client activity that led to 3.7% revenue growth, even though profitability is currently being held back by investments in future growth. If the revenue increase can continue as the investments wind down, that should lead to meaningful margin improvement ahead for LIOX.
Although earnings this year may fall short of last year’s 20 cents a share, improvements from growth initiatives and the overall stronger economy could lead to operating EPS of 30 cents per share in 2014, which would support the shares. The stock is coming off a strong finish to September, and I like the momentum it has heading into the fourth quarter.
Material Sciences (MASC[3]) had a weak end to the third quarter, but appears close to a significant turnaround in performance as auto demand remains strong, easy earnings comparisons are ahead, and shares remain cheap at 5.63 EV/EBITDA.
The company has now passed its anniversary of lost business at Ford (F[4]), and future sales will be enhanced by automotive companies seeking to reduce the mass and noise levels of their cars going forward – qualities that MASC’s quiet steel and aluminum products enable. While the automobile industry is cyclical, it is strong right now, and with the company generating $10 million in free cash flow per year and having an enterprise value of just $60 million, the stock could take off if MASC achieves the expected earnings improvement.
Tandy Leather Factory (TLF[5]) has had an uneven performance recently, but I believe this is primarily due to erratic trading caused by small volumes rather than the underlying performance of the company, which has been solid.
In July, Tandy reported a 9% gain in revenues and a 6% increase in earnings, with margins compressed by increased marketing expenses and a mix in sales away from the national accounts group. This was followed up with a 7% sales jump in August and a 6% pop in September, indicating that top-line growth remains strong as management works to reduce marketing costs.
TLF’s international business, while small, has also been growing rapidly, with sales up 26% year to date. Considering this growth, shares are very attractively valued at less than 12X expected earnings of $0.68 a share in 2013.
Vonage’s (VG[6]) solid third quarter wavered a bit toward the end, but shares have recently been rebounding. Earnings are currently being pressured by marketing spending for the company’s new $9.99-per-month Basic Talk program. Management believes the product, which is directed toward individuals without landlines that are looking to supplement their cell phones, will not cannibalize existing customers.
Another growth driver for Vonage is its international presence. Back in February, the company entered a joint venture with Brazilian-based Datora Telecom to deliver communications services in Brazil. We will get a better idea of how this venture is progressing when VG releases third-quarter earnings later this month. While EPS is expected to decline to 4 cents from 9 cents on the higher marketing expenses, the stock should perform well if the company is successful in bringing in more Basic Talk customers.
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