Kennametal (KMT): A 'Kenneth Fisher' guru play

Filed under: International markets, Newsletters, Commodities, Oil, Agriculture, Stocks to Buy

In his Validea newsletter, John Reese selects stocks using the investment strategies of the market's leading gurus, such as Benjamin Graham, John Neff, Warren Buffett, David Dreman, and Peter Lynch.

The advisor, and author of the just-published The Guru Investor, recently ran a screen based on the investment strategy of Kenneth Fisher to find his latest buy recommendation -- Kennametal (NYSE: KMT).

Reese explains, "For decades, the price-to-earnings ratio has been the most widely used valuation measure for stock investors, and a key tool in the arsenals of many of the gurus I follow. ut in 1984, Kenneth Fisher sent a shockwave through the P/E-conscious investment world.

"Fisher felt thqat that earnings -- even earnings of good companies -- can fluctuate greatly from year to year. Rather, he found that the sales of what he termed 'Super Companies' -- those that were capable of growing their stock price 3 to 10 times in value in a period of 3 to 5 years -- rarely decline significantly.

"Because of that, he pioneered the use of a new way to value stocks: the price-to-sales ratio (PSR), which compared the total price of a company's stock to the sales the company generated.

"Fisher's findings -- and his results -- helped make the PSR a common part of investment parlance, and helped make him one of the most well-known investors in the world.

"The common sense, mostly quantitative approach he laid out in Super Stocks also caught my attention, and led me to create my Fisher-based Guru Strategy.

"Kennametal is a supplier of tooling, engineered components and advanced materials consumed in production processes.

"End users of its products include metalworking manufacturers and suppliers in the aerospace, automotive, machine tool, and machinery industries, as well as manufacturers and suppliers in the highway construction, coal mining, quarrying and oil and gas exploration.

"According to my Fisher screen, the prospective company should have a low Price/Sales ratio. Smokestack (cyclical) companies with a Price/Sales ratio between .4 and .8 represent good values according to this methodology. KMT passes this test as its P/S of 0.46 based on trailing 12 month sales, falls within the 'good values"'range for cyclical companies.

"Less debt equals less risk according to this methodology. KMT's Debt/Equity of 36.53% is acceptable, thus passing the test. Also, the prospective company should have a low Price/Sales ratio. KMT's P/S ratio of 0.46 falls within the 'good values' range for cyclical industries and is considered attractive.

"This methodology looks for companies that have an inflation adjusted EPS growth rate greater than 15%. KMT's inflation adjusted EPS growth rate of 27.14% passes the test.

"This screen also looks for companies that have a positive free cash per share. Companies should have enough free cash available to sustain three years of losses. This is based on the premise that companies without cash will soon be out of business. KMT's free cash per share of 1.03 passes this criterion.

"In addition, this methodology looks for companies that have an average net profit margin of 5% or greater over a three year period. KMT, whose three year net profit margin averages 8.17%, passes this evaluation."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.

 

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