Bulls Beware: El-Erian Says More Downside Ahead

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(Written by Rebecca Lipman. List compiled by Eben Esterhuizen, CFA. Data sourced from Fidelity.)

It's the age-old investing consideration: "To buy into the dip or not to buy". It is perhaps the most philosophically intriguing and debated question that has arisen in recent months.

"According to conventional wisdom, this simple question has an equally simple answer - "of course" - that is supported by the vast majority of historical cases," writes Mohamed A. El-Erian (pictured left), CEO and co-CIO of PIMCO, and author of "When Markets Collide."

But is that the correct answer at present? According to El-Erian that highly depends on where you think the market will go next. Over the past months "so many unthinkables have turned into reality" creating a unique economic environment where conventional wisdom ceases to serve its purpose.

"Cheap stocks and corporate bonds can get a lot cheaper before regaining their footing. This is especially true when the combination of too much debt and too little income growth forces a system to deliver, as is increasingly the case these days… These dynamics are particularly worrisome today as market after market falls victim to volatile and destabilizing feedback loops fueled by weak economic growth, high unemployment, debt overhangs, fragile banks and inept policymaking."

He likens buying stocks today to buying a house in a deteriorating neighborhood. Additional considerations include how bad that neighborhood may get, or if it will stabilize, or even if it will get better. And if so, is the possibility fully priced in?

According to El-Erian, to buy today is to buy into a high risk market that offers no guarantee of escape from "the grips of both bad macro and bad technicals." Surely, he concludes, there will be more opportunities to buy good companies at cheap prices down the road.

If you're interested in tracking El-Erian's projections, you can use the list below as a starting point for your own analysis.

All of these companies appear to be deeply undervalued, when comparing the PEG, Price/Sales, Price/Book and Price/FreeCashFlow ratios.

Furthermore, all of these companies have proven themselves to be more profitable than their competitors over the trailing twelve months (TTM).

Judging by their past profitability and current valuations, many value investors would like to take a closer look at these stocks. That said, if El-Erian is correct, there may be more downside to these names. What do you think?

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1. Esterline Technologies Corp. (ESL): Designs, manufactures, and markets engineered products and systems primarily for the aerospace and defense market, as well as for industrial/commercial and medical markets in the United States and Europe. PEG ratio at 0.73, Price/Sales ratio at 0.9, Price/Book ratio at 0.93, and Price/FreeCashFlow ratio at 9.29. TTM gross margin at 39.57% vs. industry average at 26.33%. TTM operating margin at 13.87% vs. industry average at 12.13%. TTM pretax margin at 11.92% vs. industry average at 7.77%.

2. Atlas Air Worldwide Holdings Inc. (AAWW): Provides air cargo and outsourced aircraft operating solutions worldwide. PEG ratio at 0.66, Price/Sales ratio at 0.61, Price/Book ratio at 0.75, and Price/FreeCashFlow ratio at 9.25. TTM gross margin at 22.51% vs. industry average at 17.77%. TTM operating margin at 12.84% vs. industry average at 10.21%. TTM pretax margin at 13.02% vs. industry average at 9.93%.

3. Symetra Financial Corporation (SYA): Operates as a financial services company in the life insurance industry in the United States. PEG ratio at 0.53, Price/Sales ratio at 0.47, Price/Book ratio at 0.4, and Price/FreeCashFlow ratio at 1.01. TTM gross margin at 18.63% vs. industry average at 16.83%. TTM operating margin at 18.63% vs. industry average at 13.52%. TTM pretax margin at 17.% vs. industry average at 12.12%.

4. Protective Life Corp. (PL): Protective Life Corporation and its subsidiaries engage in the production, distribution, and administration of insurance and investment products in the United States. PEG ratio at 0.5, Price/Sales ratio at 0.4, Price/Book ratio at 0.33, and Price/FreeCashFlow ratio at 2.36. TTM gross margin at 17.64% vs. industry average at 16.83%. TTM operating margin at 17.64% vs. industry average at 13.52%. TTM pretax margin at 14.32% vs. industry average at 12.12%.

5. FBL Financial Group Inc. (FFG): FBL Financial Group, Inc., through its subsidiaries, sells individual life insurance and annuity products in the United States. PEG ratio at 0.81, Price/Sales ratio at 0.65, Price/Book ratio at 0.61, and Price/FreeCashFlow ratio at 1.73. TTM gross margin at 21.01% vs. industry average at 16.83%. TTM operating margin at 20.8% vs. industry average at 13.52%. TTM pretax margin at 19.22% vs. industry average at 12.12%.

6. Gannett Co., Inc. (GCI): Operates as a media and marketing solutions company in the United States and internationally. PEG ratio at 0.96, Price/Sales ratio at 0.41, Price/Book ratio at 0.91, and Price/FreeCashFlow ratio at 3.5. TTM gross margin at 45.18% vs. industry average at 43.03%. TTM operating margin at 19.18% vs. industry average at 16.46%. TTM pretax margin at 14.61% vs. industry average at 12.31%. 



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: AAWW , ESL , FFG , GCI , PL , SYA

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