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2 Low Risk, Financially Strong Names With High Potential

A look at some lesser-known names that seem poised to deliver big-time results

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Dec 29, 2021
Summary
  • Grand Canyon Education's net profit margin has expanded nearly 2000 basis points over the last 10 years.
  • Neogen has also delivered impressive growth over the last decade.
  • Both stocks trade with at least a 25% discount to their GF values.
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With a massive number of stocks to pick from, investors can easily overlook lesser-known names. But just because a company is small or out of the limelight doesn’t mean its stock can’t offer excellent returns.

In this article, we will examine two lesser-known stocks that appear to be low-risk and high-reward opportunities thanks to strong fundamentals and impressive growth records. Both stocks are also trading at a sizeable discount to their respective GuruFocus Values.

Grand Canyon Education

Grand Canyon Education, Inc. (

LOPE, Financial) focuses on providing a wide variety of support services to institutions offering post-secondary education. The company produces infrastructure, operations and technological solutions to clients. Grand Canyon is valued at $3.4 billion today and generated revenue of $844 million in 2020.

Grand Canyon has shown remarkable results over the last decade as the demand for its services has grown at a robust clip. Revenue had a compound annual growth rate (CAGR) of close to 8% for the 2011 to 2020 time period.

While this growth is solid, it is the expansion in the company’s profit margin that has really stood out. Grand Canyon had a profit margin of 11.8% in 2011, which was already impressive, but this has grown to 31.3% as of 2020. This enabled the company to see earnings per share grow at almost 20% per year over the last decade. The share count increased slightly over this period, so it wasn’t buybacks that helped deliver this level of growth. The earnings CAGR has slowed just slightly to 15.4% for the past five years, but even so, Grand Canyon is still seeing robust improvements in its bottom-line.

Given this performance, it isn’t shocking to see the company receive high marks on its financial strength.

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Grand Canyon receives an 8 out of 10 rating on financial strength from GuruFocus. The company’s best showing is its equity-to-asset ratio, which tops nearly 90% of the 243 companies in the education industry. This is also near the top score for the company over the last decade. The debt-to-equity ratio is also very strong, beating 87% of the peer group. Interest coverage compares well to the education industry, though it is below the half way mark of the last 10 years for the company. The company also has a good showing on the Piotroski F-score and Altman Z-score.

Grand Canyon does have a low cash-to-debt ratio, which ranks below three-quarters of the competition and is at the very low end of the long-term range for the company. That said, the company seems to have strong enough financing lines and cash flows and low enough interest rates on its debt to make up for it.

The stock trades at just over 14 times this year’s earnings estimates, which trails the 10-year average price-earnings ratio of 16.8. Grand Canyon’s forward valuation is below both its medium- and long-term earnings growth rates.

Shares are trading at discount to their intrinsic value as well, according to the GF Value chart.

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With a current price of $85.25 and a GF Value of $111, Grand Canyon has a price-to-GF-Value ratio of 0.77. Reaching the GF Value would result in a 30% return from current levels.

Neogen Corp

Neogen Corp. (

NEOG, Financial) specializes in developing, manufacturing and marketing food and animal safety products. The offerings in the Food Safety business are used to detect dangerous substances in the products of food manufactures and processers. The Animal Safety segment provides veterinary tools, animal pharmaceuticals and vaccines. Neogen has a market capitalization of $4.8 billion and produces annual revenues of $468 million.

As with Grand Canyon, Neogen has shown high levels of growth over the years. Revenue has a CAGR of almost 11% over the last decade, though top-line results have slowed down slightly to 6.7% over the past five years. Net profit margin has bounced higher and lower during the last 10 years, but finished higher by 80 basis points to 13% at the end of the 10-year period as compared to the start.

The share count has increased by 13 million over the course of the last decade, but earnings per share still grew at more than 10% annually.

Neogen also receives a high rating on financial strength.

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Neogen scores a 9 out of 10 on financial strength. With a rating like this, it is not surprising that the company ranks ahead of the competition in almost every category. With no debt, Neogen ranks above 99.6% of the 254 companies in the medical diagnostics and research industry on its cash-to-debt ratio. Interest coverage tops 99% and the equity-to-asset ratio bests 91% of the peer group. The Altman Z-score is at the high end as well.

The one area where Neogen doesn’t score near the top is on the Piotroski F-score, but it still receives a solid 6 out of 9 in this area.

Neogen has routinely traded with a very high valuation over the years, with an average price-earnings ratio of more than 51 for the decade. Using this year’s earnings estimates, the stock has a forward price-earnings ratio that's even higher at 70.2. On the plus side, using 2023 earnings estimates, the forward multiple drops to close to 44. This is still a high multiple, but more in-line with Neogen’s long-term average.

On the other hand, the GuruFocus Value chart shows the stock to be trading at a steep discount to the GF Value.

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Neogen has a current price of $46.21 and a GF Value of $57.94. This gives the stock a price-to-GF-Value ratio of 0.80. The stock could return more than 25% if it were to reach the GF Value.

Final thoughts

Grand Canyon and Neogen are two examples of small companies rarely discussed in financial media that nevertheless have impressive fundamentals and financial strength. Both stocks are trading well below their GF Values despite high growth, suggesting that investors could see considerable upside potential from current levels.

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Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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