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Obviously, we all want to make money in this market..Not just preservation of capital..I can basically say preservation of capital would have been most appropriately engraved in your thought processes in 2007 till Dec of ’08. I say this because once a bear market looks ugly,hence Sept ’08 to early Dec. ’08,fundamentals are out of the equation..However,that wont last forever..Eventually fundamentals will matter..And it started to matter by the end of last year..This is good in my opinion-that means that the companies that were thrown out including the baby with the bathwater,are now looking spicy.

As I see some that are wading back to shore after the more weaker ones are left out to sea, 4 companies come to mind. They are Drum Roll Please………………

Dynamic Materials (ticker tape-BOOM), K-Tron International (KTII), Middleby (MIDD), Sun Hydraulics (SNHY).

I currently own MIDD and SNHY..Why do I like these stocks?..#1. Each company possesses positive, consistent and growing cash flows.#2. They each have consistent margins and not decreasing margins or fluctuating ones.# 3 Each has better than average returns of equity over their own investment of spending..MIDD is exemplary in this by a formula called ROIC/WACC.Return on Invested Capital divided by Weighted Average Cost Of Capital..MIDD has turned its company around ever since Bassoul Selim,the company’s CEO, started buying these food service commercial business equipment on the cheap and then selling immediately off the less profitable food preparation equipment in its portfolio as far as profit margins.. Basically,companies under Darden Restaurants for example want ovens that run all day be cost efficient as far as both preparation timing and energy costs..That is what Middleby ovens do..The Turbochef acquisition will only help their ROIC position over the average organic growth of 9% of past equipment not counting recent acquired equipment made at the beginning of 2008..Dan Wieman, a market analysts in January of last year,did several owner earnings calculations of MIDD at different growth rates.. With just this 9% organic growth (and keep in mind steel prices were a lot higher then which would depress margins on acquisition costs to operated profit margins in the future on those acquisitions), Wieman stated according to an Owner Earnings calculation-the stock would be worth about 49.86 a share at this 9% never -acquiring -any- more -profitable companies growth rate. Repeating it more clearly,that is without any more acquisitions of commercial oven companies..The stock price is currently trading at 22.91 a share at the close of 2/20/09. And last earnings they still grew at 16% over the prior year’s third quarter. # 4 They all have strong balance sheets.. BOOM for example has amassed cash per share at 2.4–this is over their earnings per share of 2.04..# 5 Each has at least 5 years of operating history..BOOM has an ROE of 26.69% and stable operating margins.I wouldnt include any financials,I repeat I wouldnt include any financials in these sieves.They are too hard to understand them with all this credit squeeze mess.
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I will get into formulas of owners earnings to at least establish some type of value on a company on another blog..But I did a Graham Intrinsic Value formula on KTII as recent as December ’08.Remember, we really have to be cautious in the undervalue side of a stock in this climate..KTII is an extremely thinly traded stock with an average volume per day trading at about 16,000 shares..So it is volatile..It’s 52 week high is 170 a share.But that intrinsic value this would put the stock at 110 a share–its about 60.54 a share..In my opinion over the long haul-at this level it’s a steal. SNHY has been downgraded by BB&T Capital Markets today..Its trading at 14.70 a share..My opinion is its just a positioning entry for firms to get on the stock on the cheap..Its balance sheet and type of business thrives in utility,construction and agriculture segments so it is well-diversely utilized in many different applications..At these levels,in my opinion,SNHY,KTII,BOOM and MIDD are all strong buys..But keep the powder dry and dont invest fully in this market is my opinion..These may very well go down in the short term. You can average cost if this happens if you keep the powder dry in my opinion..In my opinion these stocks are long-term buy and holds but are not short term trade recommendations by both of us..

Mike currently owns both SNHY and MIDD stocks but currently doesnt own any KTII and BOOM shares of stock. Rob currently doesnt own any shares in SNHY,KTII,MIDD and BOOM..Mike would possibly like to own both BOOM and KTII in the near future and Rob would possibly like to own MIDD,SNHY,KTII and BOOM in the near future.Please do your own independent research before you make an investment purchase. See our disclaimer.

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