Tag - NASDAQGS:LANC

***The reports out this morning state that consumer spending rose in March by the largest amount in the last five months. This spending helped to grow GDP by 3.2 percent between January and March – the third quarterly increase since last summer.

But the increase in consumer spending came at the expense of savings, which dipped to 2.7 percent in March from 3 percent in February. Economists such as Paul Dales from Capital Economics called the drop ‘disconcerting’ since the underlying reality is that Americans aren’t seeing their incomes rise. Higher spending, coupled with decreased savings, and a lack of income growth is not a recipe for a sustainable economic recovery.

Stocks have just been ripping higher lately. Sure, there are some ripples as managers steer their companies through the turbulence of an economic recovery. But the trend higher is unmistakable. It’s like there are more buyers of stocks than sellers, and simple supply-demand economics is pushing stock prices to ever higher levels.

When the current seems to be carrying almost all stocks higher, like it is now, I begin to question whether investors are remembering fundamentals. Sure, we know not to fight the trend – that’s a sure way to lose. But we also don’t want to be the last one on the gravy train either. Keep a cool head when stocks are moving straight up, and don’t forget that they can move straight down too. This balanced mentality will help you protect yourself from being that unfortunate last person on the train. But it will also give you the confidence to purchase shares of your favorite companies when shares pull back.

So even though I believe the stock market will continue to run higher in 2010, let’s remain cautiously optimistic. Don’t throw caution to the wind just because it seems that everyone is feeling good about the market’s 70% run higher from the 2009 lows.

The market made a nice move higher yesterday, but the Russell 2000 small-cap index came up short of closing at the 600 level. Intraday, the index topped out at 597 around noon then trended sideways for the afternoon to close at 595. As I said yesterday, the longer the Russell 2000 stays below 600, the more likely it becomes that the psychologically important level will act as upward resistance.

But despite the pressure on the index, several small-cap stocks that we've been following here in Small Cap Investor Daily are moving higher. Lancaster Colony (Nasdaq: LANC), a company I first recommended on December 4^th has risen 12.5% since I mentioned the stock in this newsletter. 

And the stock has risen 2.2% since I gave you my take on Lancaster's earnings release on January 29^th, despite a 2.1% decline in the Russell 2000 over the same period.

At that time I wrote, "Lancaster Colony won't knock your socks off, so feel free to sit back and relax while you read this. But the stock should be trading at least 10% higher, and could even rise as much as 28% in the next six months. That should be exciting to investors."

The phrase earnings quality is a bit of a misnomer. How is one dollar of earnings any better than another dollar? And isn’t quality subjective anyway? In last Wednesday’s issue of Small Cap Investor Daily, Finding Diamonds in the Rough, I said that in a future issue I would review two fundamental analysis metrics, earnings quality and cash flow. Today I’m digging in to the meaning of earnings quality so that you can put this fundamental analysis metric to work uncovering small-cap gems to add to your portfolio.

When I talk about earnings, I’m often referring to earnings per share (EPS), which is net income divided by the number of shares outstanding. Sometimes net income is referred to simply as profit, or even just as earnings.Simply put, earnings are a company’s net profits from operations. There are three sub-totaled line items on an income statement that you should look at:

1         Net income from operations (operating net income): This is the calculated profits including all revenues, minus direct costs and expenses related specifically to the core business. It usually excludes nonrecurring, or noncore sources of income, but history has demonstrated that some companies use a loose interpretation. More on that in a minute.

2         Net pre-tax income: This adds other income and subtracts other expenses from operating income, but it does not include the liability for income taxes. Typically, these adjustments include interest income and expense, currency exchange profit or loss, capital gains and losses, payments or receipts in settled or finalized lawsuits, and other nonrecurring, non-core transactions.

3         Net income: This takes the net pre-tax income and deducts the liability for federal income taxes (state and local taxes are already deducted in the expense section of the report). The tax hit can be a big number. As of 2009, corporations can be required to pay up to 38 percent of their net income in federal taxes.

Depending on the company you’re looking at, certain income items may be worth special consideration. For example, in last Friday’s issue of Small Cap Investor Daily, The Gig is up – This Stock’s a Winner, I reviewed Lancaster Colony (Nasdaq: LANC). Lancaster has a history of receiving cash distributions under U.S. anti-dumping law. This income is accounted for as ‘other income’, and not included as part of operating income.

So when it came time to evaluate Lancaster’s revenue and earnings growth I highlighted the fact that excluding these distributions gave a better picture of Lancaster’s true business growth. And to show how important the difference can be, I found that Lancaster actually increased net margins to 12.7% over the last year. If I didn’t break out the ‘other income’ cash distributions, it looked like the profit margin was just 7%.

Today we’re taking a look at an under the radar small-cap stock that has the potential to reward investors with big profits in 2010. I recommended Lancaster Colony (Nasdaq: LANC) in Small Cap Investor Daily on December 4^th and since then the stock is up 9%, with more gains on the way. This will be a fun stock to review since the company just reported strong second quarter fiscal 2010 results yesterday (note that the quarter ended December 31, 2009). 

Lancaster Colony won’t knock your socks off, so feel free to sit back and relax while you read this. But the stock should be trading at least 10% higher, and could even rise as much as 28% in the next six months. That should be exciting to investors.  

On December 4^th I recommended a couple of small-cap consumer stocks because they had been passed over by investors who were seeking big returns in more glamorous companies. These two stocks have been good performers lately, so I want to give you an update on each.

The two companies I suggested you pick up on the cheap were National Presto Industries (NYSE: NPK) and Lancaster Colony (Nasdaq: LANC). I branded these two companies as 'boring stocks' and praised their attractiveness at that time. Here is what I wrote:

"I've been looking at a group of stocks that are about as flashy as a stack of corrugated cardboard boxes.  But don't let their appearance fool you, inside their drab exterior lies a steady flow of cash.  And investors who are willing to step back from the glitz of high-tech companies and the glamour of Wall Street's current darlings could be sitting on a boatload of profits in 2010 if they buy shares of boring stocks right now.

That's because this group of stocks has been overlooked as investors sought higher returns from faster moving stocks.  But after the 60% rise for stocks since March, investors are going to start buying more shares in companies that have underperformed, but still have compelling business models and shares trading at reasonable valuations.  Both large-caps and small-caps in this category should fare well, but I favor small-caps because they typically rise more than large caps."

I've been looking at a group of stocks that are about as flashy as a stack of corrugated cardboard boxes.  But don't let their appearance fool you, inside their drab exterior lies a steady flow of cash.  And investors who are willing to step back from the glitz of high-tech companies and the glamour of Wall Street's current darlings could be sitting on a boatload of profits in 2010 if they buy shares of boring stocks right now.

That's because this group of stocks has been overlooked as investors sought higher returns from faster moving stocks.  But after the 60% rise for stocks since March, investors are going to start buying more shares in companies that have underperformed, but still have compelling business models and shares trading at reasonable valuations.  Both large-caps and small-caps in this category should fare well, but I favor small-caps because they typically rise more than large caps...