“Stamps.com, Inc. (STMP Nasdaq)—This California-based company ($575 million market cap) allows customers to pay for and print postage for a variety of letters and packages online. The 16-year-old firm gets solid marks from several of my models, including my Peter Lynch- and Motley Fool-based strategies. [The latter] methodology seeks companies with a minimum trailing 12 month after-tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. STMP’s profit margin of 25.20% passes this test. Relative Strength: The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. Although STMP’s relative strength of 86 is below the acceptable level, it is very close. Keep an eye on the stock as it could move into the acceptable range. ... Cash Flow From Operations: 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. STMP’s free cash flow of $0.05 per share passes this test. Profit Margin Consistency: STMP’s profit margin has been consistent or even increasing over the past three years (Current year: 33.34%, Last year: 25.85%, Two years ago: 6.46%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise. Cash and Cash Equivalents: STMP’s level of cash $35.9 million passes this criteria. If a company is a cash generator, like STMP, it has the ability to pay off debt (if it has any) or acquire other companies. Most importantly, good operations generate cash. ... Long Term Debt/Equity Ratio: STMP’s trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don’t need to borrow money in order to grow. ‘The Fool Ratio’ (P/E To Growth): The ‘Fool Ratio’ is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (STMP’s is 0.38), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. STMP passes this test.”
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, 6/7/13
