Zacks Investment Ideas feature highlights: Strum Ruger, Gorman Rupp and Michael Kors

CHICAGO, Aug. 23, 2013 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Strum Ruger (NYSE: RGR-Free Report), Gorman Rupp (AMEX: GRC-Free Report) and Michael Kors (NYSE: KORS-Free Report).

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Revenue Surprises & Institutional Interest

Want three good reasons to buy three good stocks?

All I keep hearing is how stocks are beating earnings, but few are surprising on the top line. That made me think about who is beating on the top line and which outperformers on top could be in line for further institutional investment.

I ran a screen of stocks that were Zacks Rank #1 (Strong Buy) that revenue surprises of more than 10%. I right sized the stocks to that of companies with market caps of more than $200M and less than $15B. Finally, I added in a parameter that I think puts them in a sweet spot for potential institutional investment.

That final parameter is a little ambiguous, but its defined as a stock that has more than 45% of its stock held by institutions but less than 85% held by institutions. The thinking here is that with a minimum amount, the stock is somewhat well known by the big players. At the same time capping it at 85% allows room for further investment from the big players without really forcing the stock much higher.

Let's take a look at three stocks that:

Hit The Target

Strum Ruger (NYSE: RGR-Free Report) is one of the stocks that fit my parameters of beating on the top line being the right size and fitting into that sweet spot for potential institutional investment.

RGR is a popular stock... popular in that it has been in the news every time there is a tragic shooting at a school or office. They make guns, and it's no secret that the Obama administration is looking at the possibility of further restricting gun ownership which has sent fence sitters into gun stores to buy a firearm before they are banned.

Crushing the topline is nothing new for RGR. This Zacks Rank #1 (Strong Buy) has posted positive revenue surprises of 14%, 12% and 16% in its last three quarters. Those revenue beats also came along with some big earnings beats of 37%, 15% and 38% respectively.

A market capitalization of just about $1B makes puts this stock in the small cap segment... but plenty of institutions have heard of this one and invested in it. Zacks shows the stock being 77% held by institutions, allowing enough room for a 5% buyer to still come in without shooting up the club.

Pump It Up!

Gorman Rupp (AMEX: GRC-Free Report) found its way on my list, and to be honest, it was the first time I ever heard of this company. With 54% of its stock held by institutions, it might have the best chance of that follow on investment from a big player.

The company makes pumps and pump systems that are used in water systems, wastewater, and in the oil business. They have been around since 1933 and are located in the heart of Buckeye Nation, Mansfield OH.

The stock carries a premium valuation when compared to the industry averages. A 23x forward PE shows a big premium to the 14x industry average. The other metrics investors look to generally show premiums as well, but the reason for that is certainly the growth. The topline is expected to grow 5% this year compared to a contraction of 3% for the rest of the industry. Next year the topline is looking at 10% growth while the industry average is set to grow at 3%.

Those growth expectations might be based on the recent beat on the topline. The company reported revenue of $106M when the Zacks Consensus Estimate was looking for $94M, so a huge beat of 13%. That topline surge allowed earnings to come in ahead of expectations as well, with the company posting a positive earnings surprise of 30%. That bottom line beat was the first in four quarters.

There is a word of caution though, the stock is rather thinly traded with average volume of around 25K shares. That in itself makes the stock hard to get into and out of for the big players. Part of the reason is the low number of shares outstanding (21M) so a secondary offering could be the best way to attract more institutional buyers.

"Looking Good Louis, Feeling Good Todd"

Michael Kors (NYSE: KORS-Free Report) was just getting on its feet when the iconic movie "Trading Places" was released. The looking good Louis line is a classic line, whether you are wearing a Michael Kors tie or not.

This company just snuck under my $15B market cap limit, but in terms of beating the top line number, KORS is clearly in a class by itself. Over the last three earnings reports, the company posted a positive revenue surprise in each, and these are not little beats, they are big.

The December 2012 quarter saw a massive beat of $97M or 17.7% ahead of expectations. That propelled the income statement to post a bottom line beat of 60%. The March 2013 quarter had a $55M beat, 10% above expectations. The bottom line saw a 35% beat in that quarter. And the most recent quarter saw revenues come in $69M ahead of expectations for a 12% beat. The analysts are getting a little better, so the bottom line was only a beat of 24%, and I say only sarcastically.

Zacks tells me that institutions hold 79% of the stock, which is a healthy amount, but there is still plenty of room for a big fish to come in and swallow another 5% of the stock outstanding. That could translate into a stock that is much higher than current pricing.

Summary

Topline growth is a powerful thing, as these Zacks Rank #1 (Strong Buy) show. Posting solid growth is one thing, but beating the expectations is another. Add in the idea of being attractive to institutions and these plays could be nice additions to your portfolio.

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