A Trio Of Baby Blue Chips

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Move over large-cap stocks; here's a look at baby blue chips with strong market positions, reliable earnings and cash flow, and stout finances, suggests Rich Moroney, editor of Upside, a service that specializes in small- and mid-cap stocks.

The stocks featured below share many of the same qualities as venerable blue chips, including:

  • Healthy increases in cash flow from operations and per-share earnings over the last 12 months, and growth in at least three of the last five years.
  • Management that seems adept at squeezing profits from assets and capital; these picks boast above-average scores for return on investment (ROI), return on equity (ROE), and return on assets (ROA). As another check on profitability, we also considered gross profitability (gross profit divided by assets), which measures how efficiently management uses assets to generate gross profits.
  • Favorable trends for gross profit margin and asset turnover (sales divided by total assets). Asset turnover gauges how efficiently a firm turns assets into sales.

While many traditional blue chips are struggling to maintain profit momentum amid a choppy economy, these baby blue chips are expected to deliver double-digit earnings growth in their current fiscal year.

AMN Healthcare Services (AMN) stands tall among the healthcare services stocks in Quadrix, our proprietary quantitative ranking system. It earns an Overall rank of 98 (out of 100), reflecting scores above industry averages for Quality (98) and Momentum (99). Scores for Earnings Predictability, gross profitability, and asset turnover rank among the 10% of our research universe.

As a leading provider of temporary and permanent skilled labor solutions to health-care providers, AMN is growing rapidly. June-quarter earnings per share more than doubled to $3.31, outstripping the consensus by $0.32. Revenue jumped 66%.

Heritage-Crystal Clean (HCCI), a provider of industrial and hazardous waste services, checks a lot of blue-chip boxes. The stock scores above 70 in six of the eight Quadrix factors. The maximum Overall score of 100 reflects strong ranks for Quality (88) and Financial Strength (85).

The environmental services segment (62% of 2021 revenue), the No. 2 U.S. provider of parts cleaning to auto repair shops, is expected to generate double-digit sales growth in the second half of 2022. In the June quarter, Heritage reported per-share earnings of $0.97, up 52% and above the consensus of $0.51. Revenue jumped 34%, as sales in the environmental services business advanced 26%.

The oil business, which collects used oil, saw sales surge 45%. The five-analyst consensus calls for per-share profits to climb 23% to $3.23 this year on 26% sales growth.

Otter Tail (OTTR) has built a track record that most blue-chip companies would envy, growing per-share earnings in nine of the last 10 years — including an 80% increase in 2021. Otter Tail operates an electric utility, manufacturing businesses, and a plastic-pipe unit.

The pipe unit has been the primary growth engine in 2022. Used for municipal water, wastewater, and reclamation systems, PVC pipe demand is outstripping supply, resulting in higher prices and fatter profit margins.

Outstanding June-quarter earnings saw per-share earnings more than double to $2.05, cruising past the consensus of $1.55. Revenue rose 40%. Management raised its earnings outlook for 2022, saying per-share profits should range from $6.83 to $7.13. The midpoint of $6.98 implies 65% growth.

About the Author

Richard Moroney, CFA, is the editor of Dow Theory Forecasts and the Upside newsletter; the vice president of research for Horizon Publishing Company; and vice president and portfolio manager of Horizon Investment Services, a money management company.

He is the inventor of the proprietary Quadrix® stock-rating system. Called "An Intellectual Heir to Charles Dow" by his peers and the press, Mr. Moroney is sought out for his accurate forecasts on the market and specific stocks by major news organizations and business groups.

He has appeared on CNN, CNBC, and Sky Radio and is often quoted in Barron'sInvestor's Business DailySmartMoneyBusiness WeekThe Washington PostThe Chicago Tribune, and the Chicago Sun Times. Mr. Moroney holds an MBA in finance from the University of Chicago.

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