As themarket reaches nearrecord highs , it's becoming harder
to find value.
Historically, the average price-to-earnings (P/E ) ratio of
the S&P 500 is about 15.
Today, the average is 19.
I'm not saying we're in a crazy bubble or the market is about
to collapse. I'm only saying thatstocks have gotten more
expensive recently as low Treasury andsavings account returns
have forced investors intoequities in a desperate search foryield
You may remember May 2009 when the average P/E ratio for the
S&P 500 hit an all-time high of 123 (a number that is
literally off the chart below).
Of course, the P/E ratio is just one measurement of value.
Others include the price/earnings-to-growth (PEG ) ratio,dividend
growth,earnings per share (
) andfree cash flow .
Peter Lynch was partial to using the PEG rate to value
companies. In his book, "One Up OnWall Street ," Lynch wrote:
"The P/E ratio of any company that's fairly pricedwill equal
its growth rate."
Since the equation for PEG looks like this:
...What Lynch mightterm as a fairly valued company will have
its PEG equal to 1.
It is a basic tenet in the Benjamin Graham value school
ofinvesting that the biggestgains are made by findingundervalued
But we're not just pursuing any old undervalued company --
some stocks are in the dumps for a good reason, and we don't want
to touch them with a 10-foot pole.
We're looking for companies that have been "unfairly punished"
bymarket sentiment , have suffered temporary setbacks, and are
poised for big turnarounds.
A recent example of this phenomenon is
Barrick Gold (
. When I wrote about Barrick a few months ago,shares were trading
at its the lowest price since 2004. For the reasons I explained
in that article, I thought the market had pushed Barrick into
I was wrong about the bottom -- Barrick continued to slide for
another month. But since hitting bottom a month ago, Barrick is
up 25 %, with no signs of slowing down.
Let's look at three stocks poised for a similar comeback.
|Buenaventura Mining Co. (NYSE:BVN )
You'd have to go back to 2005 to find share prices
this low. With a forward P/E of 5, a PEG ratio just over
1, and share prices belowbook value , Buenaventura has
seen better days.
But the recent uptrend in gold prices, combined with
several new projects under production, could be
thecatalyst the company needs to turn things around.
In 2010, Buenaventura began production at its La Zanja
gold mine in Peru. The mine is expected to produce
100,000 ounces of gold peryear at below-average costs.
The mine is operated as a joint venture with
Newmont Mining (
Tantahuatay, another Peruvian gold mine with similar
production estimates and costs, began production in
August 2011. The company's Chucapaca project is expected
to be a top-tierasset , but won't begin production for
Because its assets are located in Peru, there are
geopolitical risks that come with aninvestment in
Buenaventura. However, these risks areoffset by the fact
that the company has been on goodterms with the country's
government since the company's founding in 1953.
With the suddenuptick in gold prices, Buenaventura shares
have risen sharply over the past week.
|ArcelorMittal (NYSE:MT )
Shares of the world's largest steel producer are are
trading at its lowest price since 2004. ArcelorMittal is
trading at less than half of book value with a PEG ratio
of -5 and a P/E ratio of 14.
Although the steel industry has been hammered by the
GreatRecession , there are signs ofeconomic recovery ,
especially in Europe where the company is based.Emerging
markets remain fertile territory for expansion.
ArcelorMittal supplies 20% of automakers' steel
worldwide. In emerging markets, which represent 80% of
global demand, the company has been aggressive. It now
boasts a 30% share of the Brazilian steel market and is
fighting for an increased presence in India and China.
Although it owns minority interests in two Chinese steel
producers, it will be an uphill struggle for
ArcelorMittal to establish any kind of dominant role in
China. China is the world's largest consumer of steel,
yet the Chinese government has kept tight reins on the
market and has blocked any attempts at majority holdings
by foreign companies.
|Banco Santander Brasil (NYSE:BSBR )
It may seem crazy to recommend a Brazilian bank, even when
it's trading for historically cheap prices.
After all, the country has a scary history of
suddeninflation and government intervention into private
But the fact is the company generates enormous amounts of
consistent free cash flow ($8 billion last year) and has
paid a dividend over 3% for the past three years.
Here's why BSBR could be poised for a turnaround:
In Brazil, six banks control more than 90% of the banking
And of these six, BSBR is the smallest. With just 10% of
the country's currentmarket share , it has plenty of room
The company is majority owned by
Banco Santander (
, Spain's largest bank. This controlling interest can be
seen as a positive in the sense that BSBR has a "Rich
Parent" relationship with SAN. SAN's experienced management
team has providedguidance for SAN during recent
acquisitions and also gives the company a leg-up when
recruiting international clients.
Banco Santander Brasil is currently trading at half of book
value with a forward P/E of 7 and a PEG ratio just over
Risks to Consider:
All three stocks carry considerable risk, primarily due to
Action to Take -->
These companies have been around for a while, pay dividends, and
at these prices, have considerableupside potential.
My favoritestock of the three is Buenaventura. I've
beenbullish on gold miners for a while now due to the huge
disconnect between their valuations and the price of gold. The
stock is currently in an uptrend and should make for a great
short-term investment at recent prices.
Forcontrarian investors eager to buy when there's "blood in
the streets," all three stocks fit the bill.
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