Four 'Boring' Stocks to Consider

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Sep 30, 2014

The hottest stocks that receive the most coverage in the press are exciting to own, but investors are often in for a bumpy ride. Take for example Apple (AAPL, Financial), who had millions of eyes watching when the company released the iPhone 6 and 6 Plus. A snafu for a company like Apple can affect stocks in a major way, whether it’s warranted or not. On the other hand, companies in a relatively unexciting industry and those with a smaller, more regional presence often enjoy more stability without the daily press coverage.

Former manager of Fidelity’s Magellan Fund Peter Lynch devotes a chapter to describing these “boring” stocks in his New York Times bestselling book “One Up on Wall Street,” which can be recognized by their unimaginative names and focus on a niche, and sometimes off-putting, industry. Lynch reasons that the lack of prestige and glamour repels those looking to ride a wave of momentum and allows others to buy at a discount.

To search for lesser known stocks, I used GuruFocus’ Undervalued Predictable screen, and simply scanned each company’s description.

Here are four “boring” stocks to consider:

1. Federated National Holding Co. (FNHC, Financial)

Federated National is an insurance holding company and underwrites homeowners’ commercial general liability, federal flood, personal auto and various other lines of insurance in Florida. The company is also licensed as an admitted carrier in Alabama, Georgia, Louisiana and Texas. Federated National has handled more than $900 million in claims, of which $370 million came from the Florida hurricanes of 2004-05, including Katrina. It also holds an A rating in Financial Stability from Demotech, a financial analysis firm.

Net income increased about 66% in FY 2013 year-over-year to $12.7 million. Federated National operates in a competitive industry as indicated by net income being about 10% of total revenue.

The P/E ratio for the trailing 12 months is currently 10.2. Its Peter Lynch earnings line is higher than Federated National’s current price, suggesting this is a good time to invest while the company is undervalued.

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GuruFocus ranks Federal National’s financial strength as 8/10 and its profitability as 7/10. Jim Simons (Trades, Portfolio) owns more than 860,000 shares of the company.

2. Pall Corporation (PLL, Financial)

Pall is a supplier of filtration, separation and purification technologies to remove a variety of contaminants from liquids and gases. The main applications for Pall’s technologies are developing drugs and vaccines, keeping equipment running efficiently and producing safe drinking water.

Baron Funds commented on Pall in the first quarter 2013 letter, pointing out that the company had an advantage in participating in the growth of the biotechnology industry without being tied to the risks in the success or failure of a particular drug.

It seems Baron was correct: The company’s gross profit is predictable and has been on a consistent upward trend, save for a dip between FY 2008 and FY 2009. Gross margin has been a comfortable 51% since FY 2011.

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Pall is currently trading at $83.13; its DCF fair value is $92.81, suggesting a 10% margin of safety. Its current P/E ratio is 25.4, while the median ratio for the industrial products industry is 12.55.

Paul Tudor Jones (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio), and Caxton Associates (Trades, Portfolio) are three gurus who currently have Pall in their portfolios.

3. U.S. Physical Therapy Inc. (USPH, Financial)

U.S. Physical Therapy operates more than 400 outpatient physical and occupational therapy clinics in 43 states. Each clinic is directed by a licensed physical therapist who drives patient volume through local doctors, former patients and other referral sources.

The company’s gross profit for the past 10 years has climbed steadily, closing at $64.7 million in FY 2013. Gross margin was 24.5%.

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U.S. Physical Therapy’s total current assets in the latest quarter were $51.8 million, a number that has been increasing since FY 2009. However, the company’s long-term debt jumped more than 50% in FY 2013 year-over-year.

The company’s P/E ratio is 29.7, which is close to its 10-year high of 31.71. GuruFocus ranks U.S. Physical Therapy’s financial strength as 9/10, and its profitability and growth potential as 8/10.

Jim Simons (Trades, Portfolio) owns more than 500,000 shares of U.S. Physical Therapy.

4. Portfolio Recovery Associates Inc. (PRAA, Financial)

Portfolio Recovery focuses on the detection, collection, and processing of unpaid and normal-course account receivables. The company also provides fee-based services such as vehicle location, skip tracing, and collateral recovery services for auto lenders, law enforcement, and government agencies.

The company’s gross profit was $735.1 million in FY 2013, almost a 20% increase year-over-year. Due to the nature of the industry, gross margin is 100%.

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Total current assets amount to more than $1.4 billion. Portfolio Recovery’s long-term debt more than doubled to $451.8 million in FY 2013 compared to the year before. However, this is less of a concern due to the amount of assets.

Portfolio Recovery is currently trading at $52.63, while the DCF fair value is $92.14, giving a comfortable 43% in margin of safety.

RS Investment Management (Trades, Portfolio) purchased more than 1.8 million shares of Portfolio Recovery in June.

To see more undervalued, but predictable companies, use GuruFocus’ screener.