StreetAuthority | May 02, 2012 12:43AM ET
One of the biggest weaknesses of the Wall Street research model is that it tends to focus on stocks that are able to make the fastest upward move, failing to really look at which stocks could post strong returns over the long haul. As a result, a number of solid long-term investment opportunities simply fall through the cracks.
But it hasn't always been this way.
Back in the days of Benjamin Graham and David Dodd -- both known as the grandfathers of value investing -- an emphasis was placed on stocks as assets. These investors focused on what a company was worth in relation to its assets, the defensibility of its business model, and the level of cash flow that could be sustainably produced throughout the years.
Every once in a while, I come across what I call a "Graham & Dodd special." These opportunities typically involve large, well-established businesses that operate in an industry with deep barriers to entry. They often involve large amounts of capital spending, creating an impediment to new firms looking to crack the market. And they can count on a steady recurring base of customers that need to keep coming back to them.
My Graham & Dodd stock for 2012: Goodyear Tire & Rubber (NYSE: GT), which is currently deeply out of favor and remarkably cheap by almost any measure. Assuming we'll be driving vehicles that have tires in the next five or 10 years, this is a company with staying power. Yet you won't find Goodyear on any Wall Street's lists of top stock ideas. Simply put, it's an unsexy business that isn't poised to outperform the market in the next few weeks or months.
Goodyear's stock stood at $15 in early January but is now down about $11. This suggests investors have thrown in the towel on 2012, perhaps noting that unit sales of tires are expected to be down this year. Yet it's important to see the total revenue figure and not just sales volumes.
Goodyear has pushed through a series of price hikes in all of its key markets, which will more than offset the sales decline in volume. As a result, sales are expected to rise around 3% this year to $23.5 billion and another 6% in 2013 to nearly $25 billion. That consensus forecast looks too conservative, because it appears to imply that 2013 tire sales will be even worse than 2012, blunting what will likely be high single-digit price increases, if recent history is any guide.
But even if 2012 is seen as a "lost year" because of weak global demand, it's worth noting the expected earnings of $1.85 per share will still be near record levels. And analysts say the heavy capital spending I noted earlier will lead to firming margins in 2013, which could propel earnings per share (EPS) to $2.50. Merrill Lynch says this figure could exceed $3 by 2014, which isn't bad for an $11 stock. Operating margins could hit a record 6.0% by 2014, thanks to those internal investments I mentioned earlier.
Still, investors are unloading this deep-value stock right now. "A large Q1 beat, confident 2013 affirmation, debt refinancing and improving pension metrics were met with a 5% stock sell-off that we, along with many investors, found puzzling," note analysts at Citigroup, who maintained their $21 price target.
Risks to Consider: Rubber prices are always a wildcard, so any sort of troubles on that front will impede margins for Goodyear.
There's really no reason to load up shares of Goodyear at this moment. Unless, of course, you want to own companies that have a tremendous long-term track record and sport very low valuations. What this stock lacks in timeliness it more than makes up for in safety, stability and a path to higher profits within a few years. And if shares reach that $21 price target set by Citigroup, you'd have nearly doubled your money if you bought at current prices.
by David Sterman
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