Four Surging Stocks That Remain Reasonably Priced: John Dorfman

A recent surge has carried stocks from losses to gains. Investors may not be smiling, but at least they’re frowning less. The Standard & Poor’s 500 Index is up 9 percent so far this month, and for the year it’s gained 3 percent. In the past 30 days, about 20 percent of U.S. stocks have risen 10 percent or more.

Few of September’s stars still strike me as bargains. Here are a few that do.

The largest one is UnitedHealth Group Inc. with a market value of about $40 billion. Based in Minnetonka, Minnesota, UnitedHealth runs what it calls organized health systems. That includes health maintenance organizations, preferred provider organizations, traditional health insurance, dental insurance, and other plans.

I was surprised when I looked at a chart of UnitedHealth’s sales and earnings growth since 2003: It was stronger than I had expected. Revenue climbed to $87 billion last year from $37 billion five years earlier.

Granted, much of the increase came through acquisitions. Still, I’m impressed with a five-year earnings growth rate of 7 percent during a time when many businesses were thrown into reverse by the longest recession since the Great Depression.

Critics might say that some of the company’s sales resulted from questionable tactics. This month the California Department of Insurance, expanding on a previous complaint, said UnitedHealth’s PacifiCare Life and Health Insurance unit has committed almost 1 million violations. If the company is found guilty of each violation and fined the maximum amount, it could face penalties of as much as $9.9 billion.

Alleged Violations

The allegations include failing to tell health providers they could appeal denied claims, wrongfully denying claims, taking too long to acknowledge claims, paying incorrect amounts and taking too much time to process claim appeals.

I don’t believe that these accusations are a fair representation of the business practices of UnitedHealth Group as a whole. And I’m confident that any fine the company ends up paying will be a lot less than $9.9 billion.

UnitedHealth Group stock looks quite attractive to me at 10 times earnings and less than 0.5 times revenue.

Corn Products International Inc. also managed to stay on its feet through the recession. Its five-year earnings growth rate is 7 percent and this year analysts expect it to have its second-best year ever, earning $2.60 a share.

You might expect a company based in Westchester, Illinois, to be provincial, but Corn Products gets almost 70 percent of its revenue from outside the U.S.

The stock is up about 30 percent this year and sells for 14 times earnings.

Raising Expectations

Macy’s Inc., the second-largest U.S. department-store chain, has gained about 17 percent in September and is up about 36 percent this year. Its advance defies the conventional wisdom that most retailers can’t do well until more people find jobs.

Unemployment continues to hovers at 9.6 percent. Yet U.S. retail sales edged up in August, and Macy’s raised its profit guidance for the second time in four months.

The Cincinnati-based company expects to earn $1.89 a share in its current fiscal year. Its best year was 2006, when it had a profit of $3.24 a share while 2009 was its low point, with a loss of $11.40 a share.

I think the stock will continue to surprise people pleasantly in the next few months. But investors should keep an eye on the debt level, which was an uncomfortable 166 percent of equity as of June 30.

Speculative Pick

For my final and perhaps most speculative choice, I recommend Dorman Products Inc., a maker of replacement auto parts, located in Colmar, Pennsylvania.

In the past five years, Dorman’s earnings rose at about a 9 percent annual clip. The company set an earnings record of $1.47 a share last year, and analysts expect $2.22 this year.

Dorman stock is up about 82 percent this year, and it sells for 14 times earnings.

I don’t know when U.S. auto sales will again hit the pace of 16 million to 17 million vehicles a year posted from 2001 through 2006. In 2009, the figure was about 11 million.

In this case, what’s bad for General Motors is good for Dorman. Fewer new-car sales means consumers are likely to buy more replacement parts to keep their old cars going.

Disclosure note: I own shares in Dorman for clients and personally. I have no long or short positions in the other stocks discussed in this column.

(John Dorfman, chairman of Thunderstorm Capital in Boston, is a columnist for Bloomberg News. The opinions expressed are his own. His firm or clients may own or trade securities discussed in this column.)

To contact the writer of this column: John Dorfman at jdorfman@thunderstormcapital.com.

To contact the editor responsible for this column: James Greiff at jgreiff@bloomberg.net

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