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Fund Manager Tom Forester: Three Old Friends (Stocks) Showing Some New Life

Ask a value manager what he likes about a company, and there’s a good chance he’ll tell you about its growth prospects. That’s because cheap stocks tend to stay cheap until a catalyst comes along to unlock the value and drive the price higher. Tom Forester, manager of the Forester Value Fund (FVALX), highlighted three of his holdings that performed well in the fourth quarter and that he expects to keep rallying as investors recognize developments that could give the stocks a lift.

The supermarket chain Kroger (KR) had a double-digit gain in the last three months of the year as investors evidently believed a pledge by management to increase long-term growth in earnings per share from a range of 6% to 8% to a range 8% to 11%. They expect to accomplish the feat, Forester said, by lifting operating margins and improving cash flow. If the company does indeed take steps to increase margins, there is plenty of headroom to work with. As the chart below shows, Kroger has reported weaker margins than such competitors as Safeway (SWY) and Whole Foods (WFM).

KR Operating Margin TTM Chart

KR Operating Margin TTM data by YCharts

Whether they are successful or not in the new initiative, the bosses at Kroger seem to be doing something right already. The company beat earnings projections for its third quarter, which ended in late October, and guided higher for the year that ends next Monday. Despite the strong move in the calendar fourth quarter, the stock still trades at a PE ratio of barely more than 10, based projected earnings for the year that’s about to begin.

Honeywell International (HON) also reported quarterly results that beat estimates – its own and those of analysts – and helped the stock to rise 7% in the fourth quarter. Forester attributed the healthy earnings growth to strength in the company’s aerospace division due to increased production by Gulfstream, for which Honeywell is the leading supplier of auxiliary power units. Honeywell’s growth in earnings per share has exceeded that of such engineering rivals as Borg Warner (BWA) and United Technologies (UTX), as shown in the next chart, yet Honeywell’s stock trades at 15.3 times 2013 estimated earnings, which is nearly identical to Borg Warner and less than the 16.6 forward PE ratio of United Technologies.

HON EPS Diluted Quarterly Chart

HON EPS Diluted Quarterly data by YCharts

Forester’s third selection, the business software specialist Oracle (ORCL), likewise pleasantly surprised analysts, beating estimates for its November quarter. What was surprising was how it achieved its surprise: by expanding in Europe, the most troubled region in a troubled world. “Whereas most companies have been reporting weakness in Europe, Oracle was able to buck that trend,” he said. “They reported European revenue growth in the quarter, which they attributed to investments the company has made over the past year to increase the size of the sales force.” Europe may be something of a plot twist, but revenue growth amounts to the same old story for Oracle. Revenues have risen 77.1% in the last five years, more than double those of such competitors as IBM (IBM), which reported strong results of its own earlier this week; the German software maker SAP (SAP) and Microsoft (MSFT).

ORCL Revenue TTM Chart

ORCL Revenue TTM data by YCharts

Conrad de Aenlle, a contributing editor at YCharts, has covered investment and personal-finance topics for more than 20 years, writing for The New York Times, International Herald Tribune, Los Angeles Times, Bloomberg News, Institutional Investor, MarketWatch and CBS MoneyWatch. He can be reached at editor@ycharts.com.

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