Pitch me a stock.

I'll use a made-up company as my example, a mid-cap industrial distributor, so the numbers are for illustration only. I'd buy it. The market prices it as a cyclical, low-margin distributor, but the business is shifting toward steadier and more profitable revenue. First, margins are going up. Its private-label products and service contracts are growing faster than the rest of the business, and they carry higher margins. Second, it's growing through acquisitions. The industry is fragmented, and it has been buying small regional competitors at low multiples. On valuation, I think it's cheap compared with its peers. It trades at about 9 times EBITDA, while similar distributors trade at about 11 times. The catalysts are the next few earnings reports, if they show margins still rising. The main risk is a slowdown in industrial activity, because volumes would fall.

I'll use a made-up company as my example, a mid-cap industrial distributor, so the numbers are for illustration only. I'd buy it. The market prices it as a cyclical, low-margin distributor, but the business is shifting toward steadier and more profitable revenue. I see about 20% upside over the next year or so. First, margins are going up. Its private-label products and service contracts are growing faster than the rest of the business, and they carry higher margins. They've gone from about 20% of sales to about 30% in three years. Second, it's growing through acquisitions. The industry is fragmented, and it has been buying small regional competitors at low multiples. It then moves them onto its own purchasing and systems, which lowers their costs. Third, it turns most of its earnings into cash, because a distributor doesn't need much capital expenditure, and management has been using that cash to buy back shares. On valuation, I think it's cheap compared with its peers. It trades at about 9 times EBITDA, while similar distributors trade at about 11 times. If margins keep improving, I don't think that discount lasts. Closing half the gap, plus some earnings growth, gets me to my target. The catalysts are the next few earnings reports, if they show margins still rising. The main risk is a slowdown in industrial activity, because volumes would fall. The others are overpaying for an acquisition, or suppliers starting to sell directly to customers. So I'd watch organic growth and gross margin every quarter. If margins stopped improving for a few quarters, I'd change my view.