If you want an edge in investing, one path is to find companies whose stocks are cheap but whose profits are improving.

I went hunting for some this weekend, and found a few, including Williams-Sonoma (WSM) and Movado Group (MOV).

To qualify for consideration in today’s column, a stock had to jump a few hurdles:

  • S. based.
  • Market value of $300 million or more.
  • Stock price no more than 15 times per-share earnings.
  • Debt less than stockholders’ equity.
  • Earnings growth at least 15% in the past 12 months, accelerating from a pace of 1% to 12% in the previous five years.

Williams-Sonoma jumped those hurdles and looked good doing it. The retailer of kitchenware and home furnishings boasted a very handsome return on stockholders’ equity of 24% in its fiscal year through January 31, 2018.

Yet its stock has been unrewarding, dropping from about $85 in mid-2015 to about $56 now.

The company, based in San Francisco, sells its goods under the Williams Sonoma and Pottery Barn brands, among others.

Sales have been rising gently and should hit $5.6 billion this year. Analysts expect earnings to grow more than 19% this year, up from a 5% gain last year.

Wall Street holds the company in disdain. Twenty-four analysts cover it but only two call it a “buy.” I differ from the consensus here. One reason I like Williams-Sonoma is that it has a high Piotroski score--a measure that takes into account the quality of a company’s earnings.

Do you have a Movado watch? Are you sure? In addition to the Movado brand, the company sells watches under the brands Concord, Ebel, Hugo Boss, Juicy Couture, Lacoste and Tommy Hilfiger. Most of the watches are made in Switzerland; they are sold worldwide.

Competition from smart watches, notably Apple’s, has smashed the stock. From above $50 in mid-2018, it has melted down to about $34.

Sales dipped in 2017-2018, but analysts expect record sales and earnings this year and next. I find the stock quite attractive at the current multiples of 12 times earnings and 1.3 times revenue.

Since I like to be contrarian, I’m drawn to International Bankshares(IBOC), which has some 200 bank branches in southern and southeastern Texas. Much of its business is tied to U.S.-Mexico trade, and a good chunk of its deposits come from Mexico.

You’d think that President Trump’s making Mexico his political whipping boy would have hurt International Bankshares. But the stock has held up fairly well.

It’s at $40, not far from its all-time high near $47 in September. Earnings in the latest reported quarter (through September 30) were up 30% from the previous year.

My friend Bernie Horn’s firm, Polaris Capital, owns more than a million shares of the stock, which adds somewhat to my conviction here. I regard Horn as an astute international manager.

As for the tensions--over trade and otherwise--between the U.S. and Mexico, I believe they constitute bad news that is real but temporary. That’s the kind of bad news that can furnish a good entry point for an investment.

Cato Corp. (CATO), a clothing retailer based in Charlotte, North Carolina, aims to sell fashionable clothes to women at a medium-to-low price point. It operates about 1,300 stores in 30 states, with Texas, North Carolina and Georgia accounting for a large share of sales.

The last three quarters have shown nice jumps in Cato’s profits compared to a year ago. On the minus side, Cato’s rich dividend yield of 8.7% seems headed for a cut because the company is paying out more in dividends than it’s making. On the plus side, Cato is debt free, a quality I relish.

Past Results

This is the fourth column I’ve written attempting to find stocks at inflection points. Results so far are nothing to write home about. The average 12-month return has been 8.7%--respectable, but well below the 14.4% racked up by the Standard & Poor’s 500 Index in the same three periods.

My “inflection point” picks have been profitable two times out of three, but have yet to beat the S&P 500.

Bear in mind that my column recommendations are theoretical and don’t reflect actual trades, trading costs or taxes. Their results shouldn’t be confused with the performance of portfolios I manage for clients. And past performance doesn’t predict future results.

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