Ralph Mitchell is a portfolio manager who strikes while the iron is hot. The president and senior financial adviser of Braintree, Massachusetts-based Carthage Financial Group, thinks money managers should look for companies that are likely to benefit from increased demand for their products and services. “In layman’s terms, I look for companies that will likely be getting more money as a result of recent events,” says Mitchell. “But be careful to watch and see that the influx of cash is being applied to the company’s bottom line, rather than to pay raises and increased bonuses for company management.”
At Carthage, an independent advisory firm that provides pension plans, mutual funds, and other types of investments for individual and small businesses, Mitchell focuses on a company’s hard numbers: its earnings per share (EPS) and its return on investment. To make selections for the portfolio he manages, he compares these numbers with those of competing firms in the same sectors. “I look for companies that have a higher book value than what their trading price happens to be at that particular time,” Mitchell explains. “I have found that looking at a company’s hard numbers, including EPS and book value, then comparing [a company's stock price] against the trading price is a lot safer than investing solely on one’s gut feeling.”
Mitchell’s goal is to invest in stocks that have rising values and healthy net profits. He thinks selecting stocks that take advantage of current trends — for example, energy companies benefiting from higher world demand in oil — is the best way to go.
His first selection, Toll Brothers Inc. (NYSE: TOL), develops, constructs, and sells residential housing. The company also has several other operations, including its own architectural, engineering, mortgage, and title and insurance brokerage division. While Toll Brothers has suffered a recent setback as a result of higher interest rates, Mitchell thinks the stock will rise soon. “The real estate market will continue to enjoy healthy gains,” he says. “And the stock is undervalued when you compare its book value of $86.61 to its trading price.”
In light of the rebuilding that will take place in the Gulf region in the aftermath of Hurricane Katrina, Mitchell favors Home Depot (NYSE: HD) and Lowe’s Cos. Inc. (NYSE: LOW). Both companies sell an assortment of building materials for home improvement, home repair, and remodeling. “After this very active hurricane season and the damage it caused, consumer demand for Home Depot and Lowe’s products will soar,” says Mitchell.
Another trend that does not seem to be slowing is the worldwide thirst for oil. Mitchell is betting on Exxon Mobil (NYSE: XOM), a company that explores, produces, transports, and sells crude oil and natural gas. “The worldwide demand for oil will continue, and there are no real alternatives that can replace the product in the volume that it’s demanded in the short term. This is an undervalued stock, considering that its book value of $104.02 is still substantially higher than its current trading price,” says Mitchell.
Finally, Mitchell sees 23% short-term