A Stock That Glitters in the Scrapyard

I pick stocks to recommend by looking at what my guru strategies like at any given time. These are computerized strategies I created through careful readings of how several of Wall Street's greatest investors ply their trade, and then automating my results. When one strategy really likes a stock, that stock is worth considering. When two like a stock, well, it is impressive. And when three like a stock, which is rare, it is cause for celebration.

Let us celebrate New Jersey-based Metalico (MEA - commentary - Cramer's Take), which practices a form of alchemy by turning scrap metal into gold, or at least into high-profit, high-growth sales. Three of my guru strategies -- those based on the writings of William O'Neil, James P. O'Shaughnessy and Peter Lynch -- indicate there is something almost magical about Metalico.

The company is in two businesses, both metal related. It operates recycling facilities for both ferrous (containing iron) and non-ferrous scrap metal. It buys metal from manufacturers, contractors, demolition contractors and others, recycles it, and produces steel, iron and aluminum which it then sells to mills, furnaces and foundries. This is a highly cyclical and volatile market. The company's second business is lead fabrication. Metalico says it is the largest such fabricator in the country.

One way the company grows is through acquisitions. It made several last year and has already announced three this year, including one made public on April 24. The company also grows through internal growth and through increases in the prices it receives.

One aspect that the O'Neil strategy highlights about Metalico is how fast annual earnings growth has been over the past five years. The strategy requires this to be above 18%, but prefers it to be north of 25%. Metalico just gets above this upper threshold with a five-year growth rate of 25.53%. Not only has growth been rapid, but is has been consistent. During the five-year period when EPS growth was so healthy, earnings per share also increased each year.

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At the time of publication, Reese was long Metalico, 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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