6 Companies That Offer Strong Value Potential for 2nd-Quarter 2017

As discussed in previous articles, the GuruFocus value screeners can identify strong value opportunities for short-term and long-term investing. The following six companies made multiple value screeners as of Mar. 29: Wipro Ltd. (WIT, Financial), The Cheesecake Factory Inc. (CAKE, Financial), Casey’s General Stores Inc. (CASY, Financial), Anika Therapeutics Inc. (ANIK, Financial), F5 Networks Inc. (FFIV, Financial) and Copart Inc. (CPRT, Financial). These six companies offer strong value potential for second-quarter 2017.

Brief summary of the financial strength scores and the FZM Screener

For over 90% of global companies, GuruFocus tracks three scores that determine a company’s financial strength: the Piotroski F-score, the Altman Z-score and the Beneish M-score. As discussed in a previous article, each of these three scores gives a different perspective: the F-score grades a company’s business condition on a scale of 1 to 9, the Z-score predicts the company’s level of financial distress and the M-score identifies whether a company likely manipulated its earnings. Strong companies have the following characteristics:

• Piotroski F-score of at least 7
• Altman Z-score of at least 5
• Beneish M-score less than -2.22

With the All-in-one Guru Screener, I generated an “FZM Screener” that includes the above three filters. The screener only considers U.S. companies that have a GuruFocus business predictability rank of at least three stars and do not trade in the over-the-counter market. As of Mar. 29, the FZM screener contains 40 companies, including The Cheesecake Factory, Copart and Amazon.com Inc. (AMZN, Financial). As illustrated in Figure 1, the FZM investing strategy generated solid returns during the backtesting period from January 2006 to March 2017.

Figure 1: FZM Screener Backtesting Results since January 2006. The test portfolio is rebalanced every 12 months and selects the top 20 stocks ranked by Predictability Rank DESC.

Value screeners identify good stock investments around the world

As summarized in Table 1, over 800 companies made at least one of the value screeners as of Mar. 29. Companies that are featured in multiple value screeners offer good value opportunities to investors. Table 2 lists the U.S. companies that made at least two of the value screeners.

Table 1: Value Screener Record as of Mar. 29, 2017

Table 2: Companies making multiple value screeners as of Mar. 29, 2017

Wipro Ltd.

Wipro, a leading information technology consulting company, offers an eclectic variety of IT-enabled services to its customers. The Indian company has generally made the Undervalued Predictable and Buffett-Munger screeners over the past months. As of Mar. 29, Wipro also made the historical low price-book screener as its P/B ratio is currently near a 10-year low.

The Indian company’s Altman Z-score seldom dropped below 5, suggesting little or no financial distress. High market cap to total liabilities ratios, which ranged from about 5 to 11 during the past 10 quarters, drove Wipro’s Altman scores.

The Cheesecake Factory

A popular casual dining restaurant, Cheesecake Factory produces a delicious variety of cheesecake. As discussed in its latest annual report filing, the Los Angeles-based restaurant prepares its cheesecakes from scratch, with “high-quality, fresh ingredients using innovative and proprietary recipes.” The company’s ability to “anticipate consumer preferences and adapt [Cheesecake Factory’s] expansive menu to the latest trends” contributed to high financial strength, profitability and business predictability. Cheesecake Factory’s predictability rank is a perfect five stars as of Mar. 30.

The restaurant’s Piotroski F-score is an excellent 8 out of 9, scoring a 1 for each criteria except for “change in working capital.” Despite having volatile F-scores during the past 15 years, Cheesecake Factory maintained high F-scores each quarter since June 2015. Additionally, the restaurant scored a perfect 9 during the five-quarter period from June 2012 to June 2013. The high F-scores are driven by several factors, including zero long-term debt, good gross margin growth and solid asset turnover. Figure 2 shows the breakdown of Cheesecake Factory’s Piotroski F-score for the past 10 quarters.

Figure 2: Cheesecake Factory Piotroski F-score Breakdown, Past 10 Quarters

As the company has good growth and value potential,  John Rogers (Trades, Portfolio) and Chuck Royce (Trades, Portfolio) purchased 45,115 and 33,437 respective shares of Cheesecake Factory during fourth-quarter 2016. The restaurant’s stock price averaged $56.51 per share during the quarter and currently trades around $62.95 per share.

Casey’s General Stores

Iowa convenience store Casey’s offers a selection of grocery products predominantly in the Midwestern U.S. The company made both the Undervalued Predictable and Buffett-Munger Screener as of Mar. 29, suggesting Casey’s has good value potential in the short term.

For both the “change in gearing” (Criterion 5) and “change in gross margin” (Criterion 8) criteria, Casey’s scored a 1 in each of past 10 quarters as illustrated in Figure 3.

Figure 3: Casey’s General Stores Piotroski F-score Breakdown, Past 10 Quarters

Casey’s also has strong Altman Z-scores, which are driven by high market cap to total liabilities and revenue to total assets ratios. Both of these values seldom dropped below 2 during the past 15 years.

First Eagle Investment (Trades, Portfolio) purchased a 110,290-share stake in Casey’s General Stores during fourth-quarter 2016.

Anika Therapeutics

Biotech company Anika Therapeutics commercializes therapeutic products around the world for tissue protection, healing and repair. As discussed in the company’s annual report filing, management at Anika Therapeutics provides a solid foundation for the company’s revenue growth through a “strong, worldwide network of distributors.” The Massachusetts-based company made a debut to both the Undervalued Predictable and the Buffett-Munger screeners during first-quarter 2017.

Anika Therapeutics currently has five good signs, including low price-book and price-sales ratios, no long-term debt and consistent operating margin and revenue growth. GuruFocus rated the company’s business predictability four stars out of five.

Anika’s Altman Z-score is currently 24.63, significantly higher than the safe threshold of 2.99. Not only does the company have zero long-term debt, Anika’s total liabilities seldom exceeded $20 million during the past five years. The company’s total market cap increased nearly fivefold in 2013, resulting in market cap to total liabilities ratios of over 25.

F5 Networks

As discussed in a previous article, the Washington-based software company has consistent revenue per share growth and high returns. F5 Networks’s operating margin and return on equity currently outperform 93% and 91% of global infrastructure companies. Additionally, the company’s returns on equity and assets are both near a 10-year high.

F5 Networks currently has an excellent Piotroski F-score, scoring a 1 for each criterion except for “change in return on assets.” The company consistently scored a 1 for Criteria 5, 7 and 9, which represent positive changes in leverage, shares outstanding and asset turnover. Figure 4 summarizes the breakdown of F5 Networks’s Piotroski F-score for the past 10 quarters.

Figure 4: F5 Networks Piotroski F-score Breakdown, Past 10 Quarters

Copart

Copart Inc., which provides vehicle remarketing services in North America, Brazil and the U.K., made three value screeners as of Mar. 29: the Undervalued Predictable Screener, the Buffett-Munger Screener and the FZM Screener. The Dallas-based auto dealer has three good signs, including a high Piotroski F-score and consistent revenue per share growth. GuruFocus rated Copart’s business predictability a perfect five stars.

Like F5 Networks, Copart has solid margins and returns: the company’s net margin, return on equity and return on assets are all near a 10-year high and outperform about 97% of competitors.

See also

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Disclosure: The author has no positions in the stocks mentioned in this article.