I recommended KVH Industries (KVHI:NASDAQ) in the May Taipan for US$12.50 a share.

Today, shares of KVHI trade for US$23.50, giving us a gain of 88%.

But did you know that I originally bought this stock on January 30, after my Value Stock Screen selected it as the number-one buy for the month?

My initial entry point was US$10.50.

I’m currently sitting on a profit of 124%. Not that you should feel slighted. After all, an 88% gain is nothing to sneeze at.

And I’m about to reveal the number-one buy for the month of July selected by the Value Stock Screen.

But before I do that, I want to tell you more about the system that discovered KVH Industries, and how, in the past two-and-a-half years, it has identified 22 stocks as buys. 18 have been winners, with only 4 losers. The average gain for the entire portfolio is 91% (even with the 4 losers).

The return of investing in profit growth

Since I was Taipan’s microcap guru during the 1990’s, I had two choices when the bull market imploded in 2000: 1) find another line of work or 2) adapt to the changing investment landscape and make some serious money.

I chose the latter.

Back in late 2000, I began tinkering with a stock picking system known as a stock screen.

In a nutshell, a stock screen allows you to tell a computer what you’re looking for in a stock. It scans the entire equities universe looking for those stocks that meet your criteria.

I used the PEG ratio as the core of my stock screen. PEG is an acronym for price-earnings to earnings growth. It’s a ratio that measures whether a company is fully valued or undervalued. To get the ratio, you divide the P/E by earnings growth.

For instance, if a stock is growing its EPS (earnings per share) by 20% per year, the stock should trade at a P/E multiple of 20. That would be a PEG ratio of 1.

A stock that is growing its EPS 20% per year but trades at a P/E below 20 is said to be undervalued. So if the PEG ratio is less than 1.0, it’s undervalued.

Basically, what I was attempting to do was buy profitable companies in the beginning stages of strong earnings growth. The idea is to lock in gains in EPS and an expansion of P/E multiples as investors hitch a ride on a stock’s growth.

Even in a bear market, there are companies still growing their EPS at a strong clip. This is the “sweet spot” of the stock market.

This “sweet spot” has yielded 18 winners out of 22 buy recommendations:

  As you can see, out of 22 buys the screen has selected, 18 have been winners, only 4 were losers, and the average gain for the Value Stock Screen portfolio is 91%.

And within the past month, the Value Stock Screen has selected what I think will be our 23rd winner.

The stock is DHB Industries (DHB:AMEX), and it trades for about US$3.75 a share.

You may have never heard of this company, but you definitely have seen its product in action

During Operation Iraqi Freedom, every news channel you flipped to had war coverage. You couldn’t avoid it. That’s neither new nor all that interesting. What’s interesting is the news outlets’ use of “embedded” journalists.

The embedded journalists were discreetly placed in select military units in order to give us firsthand accounts of the war.

What’s amazing is that none of the journalists were picked off. While the journalist safe-houses frequently came under attack, Ted Koppel, Geraldo, and various CNN fall guys remained out of harm’s way.

How’d they do it?

It’s not a big mystery. They were equipped with the newest and finest in 21st-century military technology. They used DHB’s bulletproof combat vests. And, get this, DHB Industries has an 80% share of the military market when it comes to combat vests.

The big picture

DHB is a holding company with two divisions: DHB Armor Group, which develops, manufactures and distributes bullet- and projectile-resistant garments, bullet-resistant and fragmentation vests, bomb projectile blankets and related ballistic accessories; and DHB Sports Group, which manufactures and distributes protective athletic apparel and equipment, such as elbow, breast, hip, groin, knee, shin and ankle supports and braces, as well as a line of therapeutic products.

DHB Armor Group consists of Protective Apparel Corporation of America (PACA), Point Blank Body Armor Inc. (Point Blank) and Point Blank International S.A. (PB Int’l). DHB Sports Group consists of NDL Products, Inc. (NDL).

For our purposes, we’re sticking with the Armor Group. 

Point blank

DHB’s Point Blank Body Armor group has set the standard when it comes to body protection through concealable armor. They have a veritable goldmine of products.

In 1994, Point Blank’s Genesis Series set a new benchmark by which concealable body armor was judged. Now, through innovative design, Point Blank combines the Genesis and Traditional Enhanced styles to create a new body armor style—The Legacy. With its extremely light weight, futuristic design and high level of comfort, The Legacy is the new standard for concealable body armor.

Here are some specs for The Legacy:

As the U.S. military becomes even more high tech, one thing will remain constant—the need for lightweight protective body armor. And the low number of U.S. combat troops killed in action in Iraq is a testament to the protective vests of DHB Industries.

Based on the Value Stock Screen, DHB has a minimum fair valuation of US$9.88.

Between fiscal year 2002 and fiscal year 2003, DHB is expected to grow its EPS by 26%.

The stock currently trades at a P/E of 11, which is less than half its estimated EPS growth rate.

Assuming it traded at P/E of 26 on this year’s expected earnings ($0.38), the stock would trade for US$9.88 a share. That’s roughly 163% higher than its current per share price.

According to the Value Stock Screen, I’m recommending shares of DHB Industries up to US$4.25.