Intentional Investing: Tough Love on Housing Recovery (Part 6)

By Penny Czarra - May 21, 2013 | Tickers: BECN, CSTE, WSO | 0 Comments

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Are there any housing recovery stocks out there that are worthy of inclusion in a reasonable growth + reasonable risk + reasonable price portfolio?

Here are 3 prospects I want to study. They straddle the wholesale/retail distribution segment of the building materials sub-industry. They have already enjoyed a fairly good run in share price, so reasonable price may be too much to hope for right now. In any case, reasonable price comes and goes with market fluctuations. An Intentional Investor's first step must be to look for reasonable growth at reasonable riskaka good businesses.

Beacon Roofing Supply (NASDAQ: BECN) has failed to achieve the 10%+ Return on Invested Capital criteria that I insist upon. I must also take a pass on Watsco(NYSE: WSO) which has, in my view, a deteriorating ROIC. CaesarStone(NASDAQ: CSTE) is generating superior profitability on a consistent and improving basis and stands-up to my first test of Tough Love.

My screening process

As an Intentional Investor wannabe, my only competitive advantage is Discipline, focus, and tough love. Im training myself to look for a reason NOT to invest. This goes against my natural grain. Ive long been a patsy for good investment stories.

I use the following four criteria -- in this order -- to make my initial cuts:

1) Return on Invested Capital (ROIC) must exceed 10%. If not, outta here!

2) Free Cash Flows must cover Long-Term Debt within four years. No can do? Cut!

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Intentional Investing: Tough Love on Housing Recovery (Part 6)