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3 Cheap Stocks With Great Management

These management teams should be good stewards of shareholder capital in today's uncertain environment.

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Looking for management teams that would be good stewards of your capital is always a good idea before you invest. You don't want executives who are going to peruse value-destroying acquisitions or only look out for the short term. Given how many opportunities firms have to make bad choices in today's environment, it is even more important to have a solid set of hands on the wheel.

Tight cost controls, the divestitures of noncore businesses, and an improving economy have allowed most firms to post impressive earnings growth and cash levels since the depths of the Great Recession. To be sure, the stronger financial position firms find themselves in today is good news; it means most companies are ready to withstand another economic downturn when it comes. But having a lot of extra cash and financial flexibility on hand has risk, too. Management teams won't be able to sit on the pile indefinitely, and most firms are on the verge of having to make some important capital-allocation decisions. The quality of those investments is going to affect the performance of those firms for years to come.

Take merger and acquisition activity for example. There have been a flurry of deals so far in 2013 as firms look to grow via acquisitions. Some of these deals might end up being net positives for investors. Small bolt-on acquisitions can make for a reasonable growth strategy and can help reinforce a company's competitive advantages. However, we remain generally skeptical of expensive transformative deals. These megadeals often fail to deliver on their promised synergies, and the agreements end up getting unwound, generally after billions in shareholder value is destroyed. If deal volume continues to pick up, having a management team that will shun sexy, but uneconomical, acquisitions is going to be important.

Add in the needed decisions regarding if and when it makes sense to return capital to shareholders through dividends or buybacks, as well as how to invest in internal projects in a period of uncertainty, and it is clear that executive suites are going to be busier than usual this year.  

To find these great management teams we used Morningstar's  Premium Stock Screener. The first thing we screened on was Morningstar's Stewardship Rating. Our analysts asses management teams' capital-allocation skills (along with a few other factors) and give them a rating of exemplary, standard, or poor. We focused on firms with exemplary management teams for this screen.

A great CEO doesn't necessarily mean that a company is a great investment, however. It's important not to overpay for a stock; buying at a discount to the firm's intrinsic value provides a margin of safety against things going awry and boosts your return potential. That's why we screened for companies with Morningstar Ratings for stocks of 4 or 5 stars. We also restricted the screen to wide-moat stocks. Firms with a wide-moat rating should be able to continue earning an economic profit for years to come, and given the choice, we'd love to own excellent businesses with excellent management teams versus a mediocre business with a good leader.

You can run the screen for yourself by  clicking here. Below are three names that passed.

 C.H. Robinson (CHRW) 
| Fair Value Uncertainty: Medium  
From the  Premium Analyst Report:    
C.H. Robinson operates an attractive non-asset-based model in an expanding industry, and its robust value proposition drives shippers to outsource more of their transportation and logistics requirements. The company does not own tractors or trailers, so a variable-cost structure and low capital intensity drive high returns on invested capital throughout the economic cycle. Robinson's ROICs averaged more than 35% over the past five years, which is the highest of the transportation firms we cover. Moreover, Robinson is by far the largest domestic U.S. truck broker, and its immense network of shippers and carriers bestows a robust economic moat that should help protect economic profits for years to come.

 John Wiley & Sons (JW.A)    
| Fair Value Uncertainty: Medium    
From the  Premium Analyst Report:  
John Wiley & Sons' science, technology, medical, and scholarly, or STMS, unit is the most attractive of the firm's three publishing enterprises. We assign the firm a wide economic moat, a rarity for a publishing company. The STMS business, which generates about two thirds of overall operating profit, sells content to academic and institutional libraries that consider the journals and books to be must-have content. Wiley's key publishing areas within STMS include physical sciences, health sciences, humanities, and life sciences. The firm is consistently at or near the top of its peers in the Thomson ISI Journal Citation Report, a leading evaluator of journal influence and impact. The rankings reflect the frequency that peer-reviewed journals are cited by researchers in other journals or texts. Authors and researchers want to be associated with the leading journal in their specialized field, so there isn't much appeal for competitors to start a rival publication.

 Compass Minerals (CMP)    
| Fair Value Uncertainty: Medium    
From the  Premium Analyst Report:      
The company is led by exemplary stewards of shareholder capital. As Compass' earnings improve, its managers will have more cash at their disposal, but we think investors should not be too concerned about the potential for future dilutive actions given the company's strong track record. Fortunately for shareholders, Compass' investments over the past several years have only enhanced its existing strengths. The company has bought a document storage business that leverages unutilized storage capacity at its U.K. salt mine and invested in capacity expansions at the Goderich salt mine in Ontario and the Great Salt Lake solar evaporation facility for the production of specialty fertilizer. In 2011, Compass acquired Big Quill Resources, a fellow SOP producer, for an attractive valuation. The company continues to work on an expansion at its Great Salt Lake facility, a high-return investment proposition by our calculations. In summary, we think the managers have taken a company with attractive assets and actually enhanced its competitive advantages, as indicated by our wide moat and positive moat trend ratings on the company. Noteworthy moves in the past two years include the most recent expansion of the Great Salt Lake facility and the Big Quill acquisition.  

Data as of March 15. 

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