Investors seem to suffer a perennial bias towards companies they've heard of.
It's perfectly understandable. As Victor Kiam used to say about Remington, "I liked the shaver so much, I bought the company."
But there are other profitable approaches to investing, and Real Money Columnist Paul Price recently found one.
“Few investors are even aware of Science Applications International (SAIC),” Price wrote recently, “because it deals exclusively with government agencies, rather than the public at large.”
This keeps Science Applications International largely off the radar. Consumers don’t bump into it very often, and the company doesn’t engage in the kind of swashbuckling that draws headlines. The upshot is that most investors won’t have heard of SAIC, and its stock symbol won’t jump off their screens.
All of this is a shame, because the exact kind of quiet stability that makes SAIC easy to miss also makes it a great investment in Price’s opinion.
“With most revenue tied to long-term government contracts,” Price wrote, “its earnings predictability is top-notch. So is the fact that they never have to worry about being stiffed on account receivables… SAIC's track record since coming public in late 2013 has been impressive. Per share cash flow and earnings per share each rose by over 230%. Dividends grew by 164% and book value increased by almost 400%.”
These are numbers that have Price impressed. What has him even more impressed is the steadiness behind them. This isn’t a volatile stock or an unpredictable company. And while investors who hold this stock have done well, their capital gains haven’t quite kept up with the quality of the company.
“That,” writes Price, “spells opportunity for today's buyers.”
He adds, “Situations like this can only occur when price-to-earnings compression has taken place. Simple regression to the mean valuations typically then provide outsized gains as higher earnings get multiplied by expanding multiples.
At the time Price wrote, the stock was trading lower than it had 5 years ago, even though "all major business metrics continued to hit new yearly highs.”
While's it's rebounded some in recent weeks, it remains well below Price's target.
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