Capital Goods Are a Capital Idea

The inventory-to-sales ratio has not changed appreciably in the past year, which is another positive sign, while the company's total debt-to-equity ratio of about 1:2 is not great but acceptable. What we have is a company whose earnings are rapidly growing while its stock is modestly priced. That's a nice combination.

Fuel Tech

Fuel Tech (FTEK - commentary - Cramer's Take), which develops clean-energy engineering solutions, such as emission controls used by utilities and industrial companies, gets a nod from the strategy I base on my understanding of William O'Neil's approach to investing.

Some things the O'Neil strategy likes about Fuel Tech: High annual earnings growth (73.13%) over the past five years, earnings consistency (four of the past five years have seen an increase in EPS), a stock price within 10% of its 52-week high (this is desirable because it could signal that the stock is about to break out to new highs) and a very strong relative strength of 96 (relative strength measures a stock's performance relative to the overall market).

Further, there are 38 other companies in that sector with a relative strength above 80, which is confirmation of Fuel Tech's attractiveness. In addition, the growth of the last fiscal quarter's EPS compared with that of the same quarter a year ago beat estimates by more than 25%, which is extremely upbeat to this methodology.

This company's stock is high priced, but the company's performance suggests to the O'Neil strategy that Fuel Tech could be headed to new -- and higher -- ground.

Watsco

The Lynch strategy likes Watsco (WSO - commentary - Cramer's Take), a distributor of air conditioning, heating and refrigeration equipment, because its PEG ratio is a very desirable 0.5 (remember, 0.5 or less is "best case" with PEG ratios). EPS is also growing at the nice clip of 30.5%, based on the average of the three-, four- and five-year historical EPS growth rate. In addition, inventory relative to sales has fallen during the past year, while debt is quite a modest 12.78% of equity. All of these add up to a reasonably priced stock and a robustly growing company.

Graco

Graco (GGG - commentary - Cramer's Take) is a maker of systems and equipment that mix, dispense and spray fluids. In its niche markets, such as paint sprayers, it tends to be the dominant player, and that is part of the reason that Warren Buffett's strategy, as I understand it, likes this company.

The strategy looks for companies with strong market positions. Also in its favor is an earnings-per-share history that is very sturdy and predictable -- EPS has increased each year for the last 10. Another big plus is Graco's lack of any long-term debt.

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At the time of publication, Reese was long Fuel Tech and Graco, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best-selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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