Market Strategies in Action: Good Greif

This column was originally published on RealMoney on Apr. 2, 2008 at 1:27 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

When you ship finished or partially finished products, you need containers. And producing these containers has proven to be an enduring and profitable business for Greif Bros.GEF.

Based in Delaware, Ohio, and founded in 1877, Greif manufacturers steel, plastic, fiber, corrugated and multiwall containers and protective packaging for such industries as agriculture, beverage, home and building products, mining, industrial products, lubricants, petroleum, pharmaceuticals, paint, wire and specialty chemicals. The company has over 10,000 employees and operates in 45 countries.

Containers may sound like a prosaic industry, but Greif proves that even the mundane can produce some investment heat. One of the strategies I use to pick stocks, which is based on the writing of James P. O'Shaughnessy, indicates that Greif is worth breaking open the piggy bank for and buying a few shares. The strategy takes a positive view of the company's size -- it has a market cap of $3.2 billion. Also in the company's favor is its consistency in earnings per share . For the past five years, earnings have increased annually without interruption.

A measure of a stock's value is the price-to-sales ratio, which looks at the stock price relative to sales. The desirable range for the P/S ratio is anything less than 1.5, on the basis of trailing 12-month sales. Greif's P/S is well below the 1.5 maximum, at 0.94, indicating that the stock is a good buy.

The strategy's last criterion relates to relative strength, which measures a stock's price over the past 12 months against the market's performance. Greif's relative strength is a strong 88, meaning its stock has outperformed 88% of the market. This places the stock among the top 50, as measured by all of the strategy's variables. This is excellent and is a strong endorsement for Greif.

William O'Neil, a well-regarded market observer, has a strategy that I have automated and use as a basis for analyzing stocks, and it, too, is fairly uncontained in its endorsement of Greif. It uses a couple of the same variables as the O'Shaughnessy strategy, including wanting earnings to increase for the past five years and looking at relative strength. With the O'Neil strategy, relative strength must be at least 80; as I mentioned above, Greif surpasses this at 88.

I follow 11 strategies that are based on the writings of well-known gurus, and one variable that's unique to the O'Neil strategy relates to the stock price. O'Neil believes that if you want quality, you have to pay for it, and that looking for a good stock that is cheap is a fool's game. According to this strategy, when a stock reaches a relatively high price, it can then have momentum behind it and be poised to rise to new levels. The O'Neil strategy says that an eligible stock should have a current price that's no more than 15% below its 52-week high. Greif's stock price is current about 5% off its peak, putting it nicely in position to move to higher ground.

Another plus is the company's very strong earnings growth. According to the O'Neil strategy, earnings growth should be above 18% and preferably higher than 25%. Greif's annual earnings growth rate over the past five years was a sizzling 36.84%.

The strategy is unusual in that it includes a look at the company's industry. According to O'Neil, an industry is attractive if at least one other company in it has a relative strength above 80; Greif's industry, containers and packaging, has 10 such companies.

A couple of other variables are worth noting. Greif's long-term debt is practically nonexistent (0.71% of equity), a level that is very desirable, and its return on equity is a robust 19.6%.

Containers are among those things that we rarely think much about but need regularly, and Greif is an important player in this vital market.

This column was originally published on RealMoney. For more information about subscribing to RealMoney, please click here.