Cheap stocks aren't as plentiful as they were seven months
In some ways, of course, that's a good thing. No one likes it
when the market craters.
But even though prices have risen from their lows, that doesn't
mean investors can't find bargains out there -- they're just
tougher to spot.
Today, we'll take a look for such bargains: Undervalued
companies with the potential for big gains -- and the added benefit
of a rich dividend yield.
The first yardstick is price-to-earnings growth ratio, which is
sometimes shortened to "PEG." This measurement helps evaluate
companies to determine which are cheap relative to earnings and
PEG is calculated by dividing the price-to-earnings ratio and
dividing it by projected annual earnings growth (expressed as a
whole number). If a company with a P/E of 20 is project to see
earnings growth of 10%, the PEG is 2.0.
Higher PEGs typically indicate a stock is overvalued; lower PEGs
may mean the company is undervalued. I sought stocks with a PEG of
less than 1.5. This resulted in 1,198 matches.
To narrow the field, I screened out companies with high
price-to-sales ratios. The P/S ratio is calculated by dividing the
stock price it by trailing 12-month revenue per share. This metric
helps investors understand the value of stock relative to revenue.
Here again, lower values can indicate undervaluation.
And while the picture this ratio paints can be incomplete, cheap
revenue is better than pricey revenue. To find a discount,
investors should pay less than $1 for every $1 in revenue. In this
screen, I eliminated stocks with a P/S higher than 1.
This left us with 535 candidates.
The earnings multiple or P/E ratio, if you prefer, needs no
lengthy explanation. It's simply the current share price divided by
the company's trailing 12-month earnings per share. In a
value-oriented screen, lower is better. I eliminated companies
selling for more than 15 times earnings, which whittled the screen
to 323 potential investments.
Next I took a look the price-to-book ratio. Calculated as the
share price divided by net assets, this ratio shows what a company
is worth if broken up into its tangible parts. A P/B ratio of 1.0
means that the company's net assets are worth exactly what you're
paying for them. (This values the actual business at zero.) Higher
P/B values, that is, greater than 1.0, assign a dollar value to the
company's underlying business. Most companies trade at a multiple
to "book value." Anything less than 1.0 means you're buying the
assets on sale and getting the business for free. For this screen,
I used a P/B of 2.0 to weed out expensive companies. This left 228
Price-to-free cash flow, sometimes painfully shortened to P/FCF,
compares a company's market cap with the amount of free cash it
If a $100 million company has $5 million in free cash flow, for
example, it would have a P/FCF of 20.
With this metric, higher numbers indicate the company's free
cash is relatively more expensive. In a value screen, of course,
we're not looking for anything expensive. I used the value 10 to
remove the pricier stocks from the list, which, after applying our
criteria so far, still had 143 companies.
Only two of those companies yield more than 6%.
Even better, they actually pay much more.
Penn Virginia Holdings
)11.4%18.104.22.168.07.8$507MHimax Technologies (Nasdaq:
Disclosure: Anthony Haddad does not own shares of any security
mentioned in this article.
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