Our first stock is a bank that beat earnings estimates buy two cents last quarter and analysts are forecasting double-digit growth for the next few years. Our contributor is also selling two previous recommendations to rebalance his portfolio and to make room for new recommendations.
Buy: Independent Bank Group, Inc. (IBTX)
From Validea Hot List Newsletter
Strategy: Small-Cap Growth Investor
Based on: Motley Fool
Independent Bank Group, Inc. (IBTX) provides a range of commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. The company operates approximately 40 banking offices in the Dallas-Fort Worth metropolitan area, the Austin/Central Texas area, and the Houston metropolitan area. The company also provides wealth management services to its customers, including investment advisory and other related services.
PROFIT MARGIN: PASS: A true test of the quality of a company is that they can sustain this margin. IBTX’s profit margin of 24.91% passes this test.
RELATIVE STRENGTH: PASS: Companies whose price has been rising much quicker than the market tend to keep rising. IBTX, with a relative strength of 91, satisfies this test.
INSIDER HOLDINGS: PASS: IBTX’s insiders should own at least 10% (they own 15.93%) of the company’s outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS: A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. IBTX’s free cash flow of $1.56 per share passes this test.
CASH AND CASH EQUIVALENTS: PASS: IBTX’s level of cash $151.3 million passes this criterion. If a company is a cash generator, like IBTX, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash.
SALES: PASS: Companies with sales less than $500 million should be chosen. It is among these small-cap stocks that investors can find “an uncut gem”, ones that institutions won’t be able to buy yet. IBTX’s sales of $203.6 million based on trailing 12 month sales, are fine, making this company one such “prospective gem”. IBTX passes the sales test.
DAILY DOLLAR VOLUME: PASS: IBTX passes the Daily Dollar Volume (DDV of $6.4 million) test. It is required that this number be less than $25 million because these are the stocks that remain relatively undiscovered by institutions.
PRICE: PASS: This is a very insignificant criterion for this methodology. But basically, low prices are chosen because “small numbers multiply more rapidly than large ones” and the potential for big returns expands. IBTX passes the price test, even though it doesn’t fall in the preferred range. The price should be above $7 to eliminate penny stocks and below $20 since most stocks in this price range are undiscovered by the institutions.
INCOME TAX PERCENTAGE: PASS: IBTX’s income tax paid expressed as a percentage of pretax income this year was (32.89%) and last year (33.99%) are greater than 20% which is an acceptable level. If the tax rate is below 20% this could mean that the earnings that were reported were unrealistically inflated due to the lower level of income tax paid.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, December 16, 2016