Contrarian investors know that the best place to look for great investing ideas is in places where no one else is looking. If you want to ferret out hidden value, then the first requirement is that a stock has to be under the radar.
Lately, one of the biggest trends in the investing world has been buying stocks with strong dividends. In a market environment in which other types of income-producing investments have largely failed to deliver enough cash, investors are piling into dividend-paying stocks no matter the cost. But as an unintended consequence, they're also ignoring some perfectly good companies that happen not to pay dividends. Those companies are the ones I want to highlight in this article.
Going where others fear to tread
Dividend stocks owe their popularity to a couple of factors. Income is definitely an important consideration for some investors. But even for people who have long time horizons and don't necessarily need dividend income right now, dividend stocks have the added appeal of generally being less volatile and providing more stable returns. With the markets approaching multiyear highs and the global economy seized with uncertainty, the prospect of a safer investment has to be attractive to nervous investors.
If you want to be greedy where others are fearful, though, you have to be willing to cut against the grain. For these purposes, I want to focus on stocks with the following characteristics:
No dividend. High-growth stocks tend to put every last penny of available earnings back into their businesses. Dividends are an admission of failure for these companies, as they indicate a lack of confidence that they can get better returns from internal investment.
Small market cap. It's easier for professionals to overlook small companies, especially when everyone's clamoring for blue-chip megacaps.
Strong growth in sales and earnings. Past performance doesn't ensure that good results will continue into the future, but 25% annual growth rates over the past five years indicate consistent growth.
A quick screen of S&P SmallCap 600 stocks with no dividends and high growth rates came up with several promising prospects, including the following.
Darling International (NYS: DAR)
With crop prices rising fast, it's expensive for meat producers to come up with the feed they need to keep their herds strong. That's where Darling comes in, taking cooking waste and transforming it into usable animal feed for livestock. An attractively inexpensive valuation is just a bonus, given the company's past growth and future prospects.
Almost Family (NAS: AFAM)
Home-health providers, on the other hand, have been hit hard in the past year, with planned reductions in Medicare payments looking like they might be the tip of the budget-cutting iceberg in the coming fiscal cliff. Yet with demographics still on the company's side, Almost Family just needs to get through a major upheaval in the health care industry in order to experience what could be explosive growth.
Coinstar (NAS: CSTR)
With Netflix (NAS: NFLX) having taken a huge hit in the past year as content acquisition costs appear to be on the rise, Coinstar has gained a lot of positive attention. Its rental kiosks are a cash cow, and rumors about a possible private-equity acquisition make a lot of sense for a stock that has dropped almost 30% from its highs in just the past couple of months.
iGATE (NAS: IGTE)
Outsourcing is a trend that has been booming for a long time, especially in the information technology realm. With iGATE counting hundreds of top corporations as clients, the company has attracted so much business that the backlog caused project delays earlier this year, holding iGATE back from even faster growth.
Take a look
Sure, these small-cap growth stories aren't for the meek. But with most investors looking to tone down their risk, these companies have a lot of potential that the market's ignoring right now, giving you an opportunity to get in while the getting's good.
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The article The Ultimate (and Smart) Anti-Dividend Play originally appeared on Fool.com.
Fool contributor Dan Caplinger doesn't have anything against dividends in moderation. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Almost Family, Netflix, and Darling International. Motley Fool newsletter services have recommended buying shares of Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is the antidote to obscure Wall Street shenanigans.