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Nathan Parsh
Nathan Parsh
Articles (194) 

3 Little-Known Stocks Offering the Potential for 24% Total Returns

The market is expensive, but some good values remain

December 28, 2020 | About:

With the S&P 500 trading with an extremely high valuation, investors searching for value might be finding it difficult to find opportunities among the top stocks in the market. However, there are still lesser-known names throughout different sectors of the economy that could offer significant potential returns.

One way to begin looking for such stocks is to utilize the GuruFocus Value Line, a unique intrinsic valuation calculation from GuruFocus. For those not familiar with this relatively new tool, the GF Value incorporates:

  • Historical multiples, including price-earnings and price-to-free-cash-flow.
  • A GuruFocus adjustment factor based on the company's past returns and growth.
  • Future estimates of the business performance

In this article, we will discuss three little-known stocks in the business services industry that appear to trade at a substantial discount to their GF Value. Each of the names in the article has also increased dividends for at least 10 consecutive years.

Cass Information Systems, Inc.

Cass Information Systems, Inc. (NASDAQ:CASS) is a payment and information processing company that markets its services to manufacturing, distribution and retail customers in the U.S. The company's services include auditing, accounting and payment processing. Cass has a market capitalization of $549 million and generated $91 million of revenue last year.

At 18 years, Cass has the longest dividend growth streak of the stocks discussed in this article. The company last raised its dividend for the Dec. 13, 2019 distribution. Shareholders have received the same dividend payment for five consecutive quarters. Despite this, Cass's dividend has a compound annual growth rate of 10% over the last decade. A dividend increase anytime in 2021 would preserve the company's dividend growth streak.

Cass has an annualized dividend of $1.08. Based on Thursday's closing price of $38.08, shares yield 2.8%. For context, this is more than a full percentage point above the stock's 10-year average yield of 1.7%. The current yield is also superior to the 1.6% average yield of the S&P 500 index.

Due to its size, Cass doesn't have an analyst following. Over the last four quarters, the company's earnings per share have totaled $1.73. This equates to a trailing price-earnings ratio of 22, which is a discount to the stock's five-year average price-earnings ratio of 26.3.

Cass appears even more attractive compared to its GF Value:

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The stock's GF Value is $54.10, which results in a price-to-GF Value ratio of 0.7. This earns Cass a rating of modestly undervalued and indicates shareholders could see a 42% return if the stock were to trade with its GF Value. The dividend yield at that level would be 2%. In total, Cass could offer a return of 44% according to these estimates.

Cass is an extremely small company, but that doesn't mean the stock can't produce strong returns. Shares of the company are cheap on a historical basis and look even better when using the GF Value. Cass has also showed a dedication to a growing dividend, even if it has been more than a year since the last raise. Investors looking for a small cap investment could do very well owning Cass at the current share price, in my view.

Insperity, Inc.

Insperity, Inc. (NYSE:NSP) provides a variety of human resource and business solutions, including payroll and employment administration, employee benefits, government compliance and workers' compensation. The company also provides training and development services. Insperity has a market capitalization of $3.3 billion and had sales of $4.3 billion in 2019.

Following a 33.3% raise for the March 19 payment, Insperity has now increased its dividend every year for a decade. The company's dividend has a CAGR of 18.2% since 2011, but the distribution has doubled since 2018. Insperity also has a habit of occasionally declaring special dividends. The company distributed an additional 50 cent dividend in 2012 and a $1.00 payment in both 2014 and 2017.

Currently, the annualized dividend is $1.60. Using the most recent closing price of $83.94, shares yield 1.9%. This is just below the 10-year average yield of 2%.

Insperity is expected to earn $4.45 per share this year, giving the stock a forward price-earnings ratio of 19.1. Historically, the stock has traded with an average price-earnings ratio of 25.5 over the last 10 years.

The stock is also trading below its GF Value:

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With a GF Value of $104.14, Insperity trades with a price-to-GF Value ratio of 0.82 as of the most recent close. Reaching its GF Value would result in a 22.6% increase in share price. Factor in the dividend yield at this level, which would be 1.5%, and total returns could be above 24%.

Insperity may not offer much in the way of income, but the company's dividend growth has been very aggressive in recent years. While the stock normally has a price-earnings ratio in the mid-20s, Insperity looks cheap at its current valuation. Shares also appear to trade well below their GF Value, making Insperity a candidate for high total returns.

Resource Connections, Inc.

Resource Connections, Inc. (NASDAQ:RGP) offers services such as finance, accounting, risk management, internal audit and supply chain management. The company also provides assistance to customers during the course of acquisitions and business development projects. Resource Connections has a market capitalization of $402.8 million. Revenue totaled $703.4 million in fiscal 2020 (the company's fiscal year ends May 31).

Resource Connections initiated a dividend in 2011 and has raised it every year since. Typically, the company raises its dividend by a penny per share per quarter. The dividend has compounded at a rate of 13.3% over the last decade. Resource Connections last raised its dividend for the Sept. 19, 2019 payment. The company has maintained its dividend for the last six quarters. A raise sometime in 2021 would allow Resource Connections to continue its dividend growth streak.

Using the annualized dividend of 56 cents and last week's closing price of $12.42, Resource Connections yields a robust 4.5%. This is two full percentage points higher than the stock's 10-year average yield of 2.5%. The highest average yield for an entire year in the past was 3.9%, which further illustrates how rarely a yield of this magnitude is seen by Resource Connections' shareholders.

Analysts believe the company will earn 55 cents per share in fiscal 2021, which would put the stock's forward price-earnings ratio at 22.6. This is nearly in-line with the 10-year average price-earnings ratio of 22.3.

The stock is also trading below its GF Value:

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Resource Connections has a GF Value of $15.89, giving the stock a price-to-GF Value ratio of 0.78. At the current price, Resource Connections is 28% below its GF Value, earning shares a rating of modestly undervalued. Shares of the company would yield 3.5% at the GF Value, which would push possible total returns to almost 32% for the stock.

As with Cass, Resource Connections is a little-followed company that appears to be a bargain. The stock has the highest current yield on this list. Investors looking for a small cap with upside potential might thus want to consider buying Resource Connections at the current price.

Final thoughts

Investors willing to branch out from the largest names in a sector can still find stocks offering a high potential return. Cass, Insperity and Resource Connections appear to be three such stocks, in my view. All three trade below their respective GF Values and each has a total potential return of at least 24%.

They are not slouching in terms of income either. Cass and Resource Connections have a market capitalization below $1 billion, but pay a higher than usual dividend yield. Despite its low yield, Insperity should appeal to dividend growth investors due to the nature of its recent raises.

Author disclosure: the author has no position in any stocks mentioned in this article.

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About the author:

Nathan Parsh
I am originally from the Detroit, Michigan area, before moving to Maryland to begin a career as an educator. This is my 15th year teaching. My wife and I have two young children who keep us on our toes.

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