Top picks 2012: Darling International

Darling International (DAR) is a 130-year-old firm is in the business of rendering. -- that is, turning animal by-products into oils and proteins used by agricultural, leather, and oleo-chemical firms.

It also recycles cooking oils used by restaurants, turning them into useable products like high-energy animal feed ingredients and industrial oils, and it recycles bakery waste into by-products like cookie meal (an animal feed ingredient).

Darling's business might sound unappealing, but it does it well -- the Irving, Tex.-based firm the largest renderer, bakery waste, used cooking oil recycler and grease trap service provider in North America, with more than 130 locations in over 40 states.

And the fact that it is involved in an aesthetically displeasing industry is a good thing for investors.
As mutual fund legend Peter Lynch once noted, companies that come from disagreeable industries -- the sort of businesses whose activities make you a bit queasy to think about -- tend to get overlooked by investors, most of whom usually target more glamorous types of companies. And that means you can often get these types of shares at a discount.

Right now, Darling's shares do seem to be trading on the cheap, considering its impressive growth story. That's why it gets high marks from a trio of my Guru Strategies, each of which are based on the approach of a different investing great.

One is my Lynch-inspired model, which likes Darling's impressive 33% long-term earnings-per-share growth rate (based on an average of the three-, four-, and five-year EPS growth rates).

Lynch famously used the P/E-to-growth ratio to find undervalued fast-growing companies. Darling has a PEG of just 0.28, which easily makes it into the strategy's best-case category (below 0.5), a great sign.

The model I base on the writings of hedge fund guru Joel Greenblatt, meanwhile, likes Darling's price -- it trades at an earnings yield of 16.2% -- and business strength -- its return on capital is 54%.

And my Kenneth Fisher-based model is also high on Darling. Fisher pioneered the use of the price/sales ratio (PSR) as a value metric in his classic book Super Stocks, saying that sales were a more stable gauge of a company's business than earnings.

Darling has a PSR of 0.90, which falls into this model's "good value" category.

The stock also has several other qualities the Fisher-based model likes, including a reasonable debt/equity ratio (34.4%), positive free cash ($0.67 per share), and strong three-year average net profit margins (6.6%).

Darling is a small-cap ($1.4 billion), which means it's more susceptible to volatility than larger stocks. But its valuation, track record, and under-the-radar status make it worth a long look in 2012.