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Bargain Hunting,
Six Undervalued Stocks
In my previous column, I described four solid
dividend-paying rebound candidates that had suffered relatively modest
15% to 20% losses, mostly triggered by the overall market downdraft.
Today, I’ll describe a screen for finding more traditional value plays.
These are stocks that recently tripped up, typically by announcing
disappointing quarterly results. Then, the weak overall market made
matters worse.
I used the free stock screening program offered by FINVIZ.com (http://finviz.com)
to find candidates. I started by looking for big recent losers.
Specifically, stocks that have dropped at least 30% so far this year. Of
course, simply finding stocks with big price drops isn’t enough. Many
will continue heading down. Thus, we must pinpoint those most likely to
recover when the market rebounds. I found six worth talking about. I’ll
give you the names later, but first I’ll describe my screening strategy
so you can find new candidates on your own.
U.S. Stocks Only – Not Too Small
Unlike almost everywhere else, the U.S. economy is still in growth mode,
and likely to stay that way. For that reason, I limited my list to
U.S.-based stocks.
Because they are higher risk, I also ruled out very small companies.
That is, stocks with market-capitalizations (value of all outstanding
shares) below $300 million.
Undervalued
This strategy requires picking candidates that are undervalued compared
to the overall market. The price/earnings ratio (P/E), which is the
recent share price divided by the last 12-month’s per share earnings
(EPS) is arguably the most popular valuation measure. However, I’ve
found better results using the price/sales ratio (P/S), which is the
recent share price divided by the last 12-months sales per share.
Because quarterly sales don’t move around as much as earnings, P/S is a
much steadier gauge. Undervalued stocks should be trading at price/sales
ratios below two, which is the maximum value that I specified.
Fundamentally Sound
Low-debt stocks are always your best bets. The long-term debt/equity
ratio, which compares long-term debt to shareholders equity, is a
reliable debt gauge. The higher the ratio; the higher the debt. I
specified a maximum 0.2 value for long-term D/E, which limits your list
to very low-debt firms. Try raising that limit to 0.3 if you want to see
more stocks.
Profitability ratios compare income to various measures of shareholders
investment. Return on equity (ROE), compares net income to shareholders
equity. Any positive ROE signals a profitable firm, but higher is
better. Specify five percent or higher for ROE.
Growth Ahead
In the end, it’s earnings growth that drives share prices up. So, we
want to limit our list to stocks that analysts expect to grow earnings.
I specified a minimum five percent for forecast next five years
(annualized) earnings growth.
Share Price Recovering
Our best prospects are stocks whose share prices have already leveled
off and started back up. Require that passing stocks must have moved at
least five percent from their lows during the last 50 trading days.
Follow the Money
Thanks to the huge trading commissions that they generate, mutual funds
and other institutional investors have more access to market moving
information than individual investors. But that’s not a problem. Simply
requiring that institutional investors have increased their holdings
over the past three months assures that we’re in sync with the big guys.
When I ran it, my screen turned up six
candidates. Click
here to see what it turns up today.
Faro Technologies (FARO): Makes imaging and measurement devices
and software.
Francesca’s Holdings (FRAN): operates retail stores selling
apparel, jewelry, accessories, and gifts.
Keurig Green Mountain (GMCR): makes specialty coffee makers and
associated products.
Ralph Lauren (RL): designs and produces fashion apparel,
accessories and fragrances.
Stage Stores (SSI): Operates 850 specialty discount department
stores in 40 states. Pays dividends equating to a hefty 5.8% yield.
The Fresh Market (TFM): Upscale grocery retailer operating more
than 175 stores in 27 states.
Consider the stocks listed by this screen, or any screen for that
matter, as research candidates, not a buy list. The more you know about
your stocks, the better your results.
published
9/1815 |
