Aunt Janet a Dove? Smoke ‘Em if you Got ‘Em

Yesterday’s FOMC meeting minutes were at best inconclusive about the Fed’s actions related to the stimulus.

While all parties concerned see a rise in interest rates, there was some indication of an ease on the ‘dot plot’ to raise short term interest rates. On a side note there was some discussion that an unemployment rate of 6.5% would trigger the raising of interest rates. Since when is this a good rate, unless you are Europe?

In what seems to be an inevitable rise of interest rates and a coming bubble on tech stocks, investors and traders seem to be looking for value and growth potential. Translation, in our world, look for an underpriced, uncorrelated, and potential growth stock.

We will stick with our vice theme this week as we spotted Alliance One International (NYSE – AOI - $2.97) as a great possibly play. The Company is a tobacco middle man, and supplies processed leaf tobacco to cigarette and other consumer tobacco products worldwide. Alliance operates on several continents throughout the world.

There are several pieces of positive news recently that indicate AOI is poised for growth. First, the Company entered into a joint venture agreement with IOTO International to provide flavored ‘E-liquids’ in the growing ‘E-vapor’ tobacco market. Also, Alliance One entered into another joint venture with China Tobacco through its subsidiary Alliance One Brasil Exportadora de Tabacos for contracts with 9,500 growers in Brazil.

The steady top line growth rate from FY2011 to FY2012 of 2.6% and 4.3% from FY2012 to FY2013 is a reason to be optimistic given the expansion of operations and markets mentioned above. A modest growth rate of 3% to FY2014 (That just ended March 31) to $2.31 billion with a slight increase to $2.37 billion in FY2015 puts the expected FY2015 EPS in the black and the FY P/E under 5. We think this is a great value. Additionally, the technical analysis is very bullish over the next 50 days.

We think AOI has room to run to the $4.50 mark by the end of 3Q13 this year.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours.

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