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In today’s modern economy, it is getting harder and harder to find organic growth. That’s why I was always seeking out the next great mid-cap stock when I was a fund manager. What I mean by that is that I wanted to find a small-cap stock that hit the magic growth spurt that makes a true mid-cap stock.

Mid-caps are the stocks that get bought out. It’s the sweet spot for mergers and acquisitions (M&A) activity. In the U.S. defense industry, most of the mid-caps are gone. In fact, this week’s pick is something of a forgotten defense play.

If you like a company that has no debt, a huge pile of cash compared to its market cap, and organic growth (and whose stock is paying a dividend), then you might be interested in Todd Shipyards Corp. (TOD). Founded in 1916 and headquartered in Seattle, the company has a market cap just north of $100 million, making it a true small-cap stock. It employs just 800 people, and is currently advertising for new project managers. I like to see real organic growth, and Todd Shipyards appears to have it in spades.

It just signed a new contract extension with the U.S. Navy to service a nuclear aircraft carrier that is being brought to Seattle for a major overhaul. Such work for the Navy is just a slice of Todd’s business; the company also works on U.S. Coast Guard ships and ferry craft.

Todd has total cash of almost $40 million, which is huge when you consider that its market cap is just $108 million. The company reported year-over-year revenue growth of 68% in its second quarter, ended Oct. 3. The company generated nearly $250 million in revenue in the last 12 months — more than $43 per share.

Also, in its second-quarter earnings report, Todd announced a jump to $7.8 million in earnings from $2.1 million a year ago. That is a year-over-year gain of about 277 percent. Those kinds of earnings will quickly catch the attention of fund managers and analysts looking for a little growth in their portfolios.

Todd currently pays a dividend of 40 cents per share, giving the stock a 2.1% yield. And if cash keeps coming in like it is, the company will either need to raise the common dividend or pay a special dividend of a couple of dollars per share.

In technical terms, the stock is trading near its 52-week high of $18.80. The 50-day moving average is at $17 and the 200-day moving average is currently around $15.50.
Buy, Sell or Hold Todd Shipyards Corp NYSE TOD is a Mid-Cap Stock

The accompanying chart shows the performance of TOD stock this year through Dec. 3. I believe someone is building a real position in this stock, and whoever it is appears to still be buying. In fact, if you look at a five-year chart, you can see the start of a major cup and handle formation, which means there’s a potential breakout looming.

So let’s do a quick review of why Todd Shipyards is a buy here:

  • It has no corporate debt.
  • The company’s unleveraged cash equates to 38% of its market cap.
  • Revenue has risen 68% over last year.
  • The stock sports a 2.1% dividend yield.
  • Todd is one of the few companies hiring in this economy.

I love to find profitable companies that have no debt, lots of cash, and are growing earnings and revenue. It’s even better when they have a long history of paying dividends.

Action to Take: Buy Todd Shipyards. But remember the stock is extremely illiquid. We do not want to be moving the stock while purchasing it, so use limit orders and patience to build your position. Todd has all of the hallmarks of a growth company about to be discovered by the street. Let’s try to get there first.