Stockpickr: Uncovering Hidden Internet Gems

It's not what you think. These stodgy firms leverage the Net.
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The Internet, it seems, has been viewed by the rest of the world in three distinct phases so far:

  • Fantasy ("All Internet businesses will have 95% profit margins, and every other company is dead!"),
  • Disgust ("The Internet is a scam!"), and finally
  • Reality ("Hmm, if we use the Internet we can improve communications with customers, improve workflow and increase productivity!").

In the first phase, everybody bid up the shares of revenueless Internet start-up companies as if each would be the world's next

GE

(GE) - Get Report

. In the second phase, people sold off profitable Internet companies until they were trading below cash in the bank. Now that reality has set in, even companies whose core businesses are not Internet-related are finding that they can improve margins and sales through growing Internet subsidiaries.

At Stockpickr, we're keeping track of such

secret Internet companies

. I believe these companies are being valued as stodgy and "Old Economy," and the market is not taking into account the margin and profit growth they will experience as their Internet subsidiaries grow.

When Tradition Meets Internet

A great example is

Illinois Tool Works

(ITW) - Get Report

. ITW, which was started in 1912, can hardly be considered an Internet company, and yet it is.

ITW manufactures engineered products. What is an "engineered product"? Anything from metal fasteners, laminated products, swabs, wipes and mats for clean-room usage in the electronics and pharmaceutical industries; and electronic-component packaging trays, dishwashers, refrigerators, etc. The list goes on.

ITW sells to major manufacturers in a host of industries, and a single customer is likely to buy thousands of different items for every part of the manufacturing process. Even though manufacturing, particularly in the auto industry, had declining growth in 2006, ITW's revenue last quarter was up 15% year over year, mostly driven by acquisitions.

And what were those acquisitions? The one I want to focus on is its September 2006 acquisition of Click Commerce for $292 million, a price that was significantly lower than Click Commerce's average market cap in the prior year.

Click Commerce is a business-to-business e-commerce provider that sells supply-chain management software, e-commerce solutions and compliance resolution software to some 1,400 clients, including

BAE Systems

,

Honda

and

FedEx

. In fact, Click Commerce's client list probably overlaps heavily with ITW's client list.

Click won't have an immediate effect on ITW's $14 billion in revenue, but the acquisition was accretive, with Click trading at a price-to-earnings ratio (P/E) of just 14 at the time of the acquisition. Click won't just grow its client list under the ITW hood, it's expected to streamline every dollar of ITW's $14 billion in revenue, increasing margins and building tighter relationships with customers.

ITW right now trades for a forward P/E of just 13 and at roughly 8 times forward anticipated cash flows. These numbers don't at all reflect what I believe will be the growth in margins from the Click acquisition. ITW is cheap here and probably an eventual leveraged buyout opportunity if management was so inclined.

ITW is a component of one of my favorite

exchange-traded funds to cherry-pick

, the

PowerShares Buyback Achievers

(PKW) - Get Report

ETF. This ETF is made up of companies that have repurchased at least 5% or more of their outstanding shares over the past 12 months.

ITW has also been consistently on the

magic formula list

. These are the companies that rank highest on Joel Greenblatt's magic formula: companies with high returns on equity and low P/E ratios.

For the rest of the "secret" Internet companies, including

J.C. Penney

(JCP) - Get Report

and others, check out the

Secret Internet Companies portfolio

on Stockpickr.

Stockpickr tip of the day:

In case you missed it, the site has a new weekly feature --

Cramer's Portfolios of the Week

. These are the top portfolios of stocks that Cramer has mentioned on his "Mad Money" TV show, in his

RealMoney

blog or on his "Stop Trading!" segment on

CNBC

. Last week's portfolios included his

Red Zone Defensive Plays

, his favorite

commodity plays

and more.

With earnings season soon upon us, I'm also keeping track of the

Top Earnings Champions

, companies that have had 10 straight years of increasing earnings.

At the time of publication, Altucher and/or his fund had no positions in stocks mentioned, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of

Trade Like a Hedge Fund

and

Trade Like Warren Buffett

. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback;

click here

to send him an email.

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