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Stock Analyst Update

New 5-Star Stock Roundup

We see value in homebuilders, insurance brokerage, and more.

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Following is a sampling of stocks that recently jumped to 5 stars. By way of background, we award a stock 5 stars when it trades at a suitably large discount--i.e., a margin of safety--to our fair value estimate. Thus, when a stock hits 5-star territory, we consider it an especially compelling value.

To get a  complete tally of stocks that have recently jumped to 5 stars--as well as our  full list of 5-star stocks including our consider buying and selling prices, risk ratings, and moat ratings--simply take Morningstar Premium Membership for a test spin. Click here to sign up for a free trial.

New Five-Star Stocks

  • Technical Olympic USA (TOA)

Technical Olympic USA

  • Economic Moat: None
  • Business Risk: Speculative
  • Price/Fair Value Ratio*: 0.35
  • Consider Buying: $6.80 or Below
  • Consider Selling: $16.00 or Above

Technical Olympic USA's (TOA) use of joint-venture financing has aided in its rapid growth over the past two years. But this no-moat homebuilder has made some poor capital-allocation decisions, in Morningstar analyst Eric Landry's view, and the financial condition of its largest joint venture is spiraling downward. Though the shares look cheap, Landry thinks they're suited only to speculators with a significant tolerance for risk.
 Full Analyst Report: Technical Olympic USA
 Stock Analyst Note: "TOUSA Releases 4Q Results" (3/19/07)

Other Recent New Five-Star Stocks

  • Arthur J. Gallagher & Co. (AJG)
  • Hovnanian Enterprises (HOV)
  • UTi Worldwide (UTIW)

Arthur J. Gallagher & Co.

  • Economic Moat: Narrow
  • Business Risk: Average
  • Price/Fair Value Ratio*: 0.77
  • Consider Buying: $28.50 or Below
  • Consider Selling: $46.40 or Above

Arthur J. Gallagher's (AJG) focus on selling insurance to niche-market clients and its successful development of scale and scope economies garner the firm a narrow economic moat. Insurance brokerage is a highly competitive business, but Gallagher has built a narrow moat by specializing in more than 20 niches, like shopping centers, universities, public entities, construction contractors, and sports teams. Niche markets can provide relatively high brokerage profitability, but the whole is more than the sum of the parts. Customers increasingly view Gallagher as a valuable solution because it provides efficient one-stop access to a range of insurance coverage and to experts in a variety of risk-management services. These include claims advocacy, appraisal services, risk-control consulting, and alternative risk solutions, like weather derivatives. Gallagher creates scope economies because customers attached to one of these services can benefit from the firm's other specialties more easily than acquiring the services piecemeal. Plus, as the firm spreads increased volume over its backbone infrastructure, its healthy operating margins increase.
 Full Analyst Report: Arthur J. Gallagher & Co.

Hovnanian Enterprises

  • Economic Moat: Average
  • Business Risk: Narrow
  • Price/Fair Value Ratio*: 0.74
  • Consider Buying: $28.50 or Below
  • Consider Selling: $46.40 or Above

After five years of explosive growth, in which Hovnanian's (HOV) revenue grew at least 25% annually, the homebuilding business suffered the same fate as the general real estate market, as prices slumped and volume slowed. The declines dramatically increased buyer power, forcing Hovnanian to accept much lower gross margins and to take impairment charges against both its inventories and goodwill. While the near-term outlook for homebuilders is grim, the overall business model is solid, in Morningstar analyst Parrish Glover's opinion. Population growth in the U.S. from immigration and internal family growth is expected to remain strong, and the U.S. tax codes are favorable to home ownership. Hovnanian's wide product range, geographic diversity, and the high credit quality of its customer base have the company positioned to weather the current difficulties and participate fully in the eventual recovery.
 Full Analyst Report: Hovnanian Enterprises

UTi Worldwide

  • Business Risk: Average
  • Economic Moat: Narrow
  • Price/Fair Value Ratio*: 0.78
  • Consider Buying: $29.30 or Below
  • Consider Selling: $47.60 or Above

UTi (UTIW) is a third-party logistics company, which means it assists shippers with managing their supply chains. It adds value not just by purchasing cargo capacity in bulk and reselling that capacity to customers that can't get the bulk discount on their own, but also by presenting its customers with ideas on how they can make their supply chains more efficient and less costly. UTi owns no assets pertaining to the movement of freight, freeing up cash for other purposes. While this strategy isn't without challenges--getting shippers to embrace this one-stop shopping model and integrating technology platforms being chief among them--Morningstar analyst Peter Smith expects UTi's above-market returns to continue for the foreseeable future.
 Full Analyst Report: UTi Worldwide

* Price/fair value ratios calculated using fair value estimates and closing prices as of Friday, March 23, 2007.

Jeffrey Ptak does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.