8 Midsize Stocks With Big-Time Ambitions

A YEAR AGO in this space I recommended shares of Fairfield, Calif.-based Copart (CPRT). It controls 35% of the auction market for wrecked cars. The stock has gained 50% while the S&P 500 index has slid 11%. The company looks likely to keep posting big profit gains, but its share price now gives me pause.

The junk-car business works best when there are plenty of wrecks and fierce demand for metal and recycled parts. Scrap metal prices are plenty high. Parts demand is healthy, too, since it's somewhat counter-cyclical. That is, in lean times drivers prefer fixing old cars to buying new ones. In even leaner times they go after 30% to 40% discounts on their parts by choosing ones that have been pulled out of wrecks.

The problem, or potential problem, is supply. Americans, pinched by high fuel prices, are driving fewer miles this year for the first time in three decades. As I mentioned on July 16 in a follow-up recommendation of shares of leading used-parts seller LKQ (LKQX), high gasoline prices tend to send cash-poor and recklessness-rich teens off the road first. Hence, the nation's accident rate is plunging.

LKQ, incidentally, is up a quick 20% since that column, vs. 4% for the S&P 500 index. It's a key customer of Copart, which buys wrecks mainly from insurance companies and sells them to dealers, exporters and strippers. (No, not that kind of strippers. Unless they also do body work. And no, not that kind of...forget it.)

Offsetting the drop in accidents is a rising willingness among insurers to declare cars total losses. That's because of a cost squeeze. The price of replacement (a new car) is suddenly falling, while the price of repair (parts) is rising. So that smashed quarter panel that would've earned your car a trip to the collision shop now might land it on the scrap heap, where it will be lovingly welcomed, then turned around at profit in 45 to 60 days via online auction, by the likes of Copart.

The company has plenty of room to grow. It has plans to fill in gaps between its 120 sites in 40 states by purchasing smaller yards. That will drive down towing costs and provide more room for a possible add-on business Copart is testing. It might start auctioning used (and still road-worthy) cars that dealers are having trouble selling. Finally, the company plans to open its auction listings to viewing by nonregistered visitors to its site, just like eBay (EBAY) will let anyone search for Hannah Montana backpacks, thereby hooking in new bidders to its registration page.

Copart should report financial results for its fiscal 2008, which ended July 31, toward the end of September. Analysts are looking for an earnings per share increase of 19% for the full year. They foresee a further 14% increase in fiscal 2009. You've heard lawmakers in recent weeks hem-hawing over the profits Exxon Mobil (XOM) is pulling down? Copart's operating margins are twice as large. They're half again as large as those of fiscal over-achiever Apple (AAPL). Profitability like that tends to attract competitors, and tends to revert to the mean over long time periods. Copart's dominance in its business looks safe for now, but my main gripe is price. Shares could be had for 21 times earnings at the time of my recommendation a year ago. Now they go for 25 times earnings. The broad market, meanwhile, is the cheapest is has looked in years. As much as I like Copart, I'm feeling frugal, just like all those parts buyers. Best for now to take a profit.

Copart turned up recently on a search for promising companies with medium-size market values. Have a look at some others that made the cut if you like. Use SmartMoney's stock screener and the full list of search criteria to run the screen for yourself anytime.

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