| Bargain-Basement
Value Plays that are Expected to Grow 20+% Per Year |
Published: March 29, 2004
(Note: In each biweekly issue of the StreetAuthority
Market Advisor, editor Paul Tracy and his staff use proprietary
software and screening methods to develop a list of investment
opportunities that might be worth examining further. The article below
is an excerpt from Mr. Tracy's March 29th issue. Please note that all
prices listed are as of that date.)
Although the markets have rallied
strongly throughout the course of the last year, many individual stocks
remain undervalued thanks to the brutal three-year bear market we saw
from 2000-2003. Along those lines, this week my staff and I went on a
search for companies that are trading at extremely attractive valuation
levels.
In doing so, however, we first had to
take another look at exactly WHAT makes a company undervalued. Should we
look for stocks with low P/E (price-to-earnings) multiples, low P/S
(price-to-sales) multiples and low P/B (price-to-book) ratios, or should
we look at some other financial metric altogether? After carefully
analyzing the pros and cons of a plethora of different ratios, for
today's scan we decided to go with price-to-cash flow, or P/CF for
short.
For those of you who are unfamiliar with
the term "cash flow," it can be easily calculated by taking
net income (after taxes), subtracting preferred dividends, then adding
back non-cash charges such as depreciation and amortization. What this
leaves you with is a more precise measure of the amount of cash that a
company brings in from its normal operating activities each year.
But as I've pointed out time and time
again, valuation is only a small part of the overall investing equation.
If you scan the investment landscape exclusively for undervalued
firms, then you're probably headed for trouble. After all, cheap stocks
often trade cheap for a reason.
With this in mind, my staff and I also
scoured the investment landscape for companies that are growing at a
fast clip. But since past performance is not necessarily indicative of
future results, we decided to take a look at upcoming growth as
opposed to historical growth. The best measure available is Wall Street
earnings expectations, so we went with that. (These expectations don't
always come true, but they're still one of the best forward-looking
measures we have at our disposal.)
With the above analysis as a backdrop,
last weekend I searched through our universe of nearly 10,000 stocks to
find companies that met the following criteria:
1. Share price of above $2.00
2. Market capitalization of greater than $100 million
3. Average daily trading volume of greater than 100,000 shares
4. Current share price divided by trailing 12-month cash flow
(P/CF) of less than 6
5. Average long-term projected earnings growth of at least +20%
per year (based on Wall Street estimates)
My goal was to come up with a list of
firms that are fairly large, heavily traded, cheaply valued and that are
expected to grow at an above-average clip over the long haul. After
running this data through StreetAuthority's advanced scanning software,
I came up with the following list of companies:
| Company
(Symbol) |
Price |
Mkt
Cap. |
P/CF |
Proj.
Growth |
| UnitedGlobalCom (UCOMA) |
$7.97 |
6.2B |
1.6 |
20% |
| KT Corp. (KTC) |
18.90 |
11.0B |
2.1 |
21% |
| SpectraSite (SSI) |
34.25 |
1.6B |
3.6 |
20% |
| Partner Comm. (PTNR) |
7.82 |
1.4B |
3.8 |
25% |
| KCS Energy (KCS) |
10.01 |
414M |
3.9 |
58% |
| Tele Norte (TNE) |
12.91 |
4.8B |
4.0 |
28% |
| Callon Petroleum (CPE) |
10.41 |
146M |
4.3 |
33% |
| Commonwealth
Ind. (CMIN) |
6.77 |
108M |
4.9 |
44% |
| Central Freight (CENF) |
11.99 |
203M |
5.1 |
29% |
| aaiPharma (AAII) |
8.47 |
236M |
5.4 |
22% |
| Boston Comm. (BCGI) |
10.50 |
194M |
5.5 |
30% |
| Osteotech (OSTE) |
6.10 |
104M |
5.5 |
20% |
| RailAmerica (RRA) |
11.76 |
376M |
5.7 |
23% |
After having my research staff take a
closer fundamental look at each of the above firms, we came to the
conclusion that all 13 companies are worth a closer look. As always,
however, please make sure to do your own due diligence on each of these
firms to decide if they are right for your portfolio. Any and all final
investing decisions for your own account are entirely up to you.
NOT YET CONVINCED THAT THE SCREENING
METHODOLOGIES WE EMPLOY IN OUR MARKET ADVISOR NEWSLETTER CAN HELP
YOU IDENTIFY HUGE WINNERS?
My staff and I ran this exact same screen in search of
bargain-basement stocks a little over a year ago. You can view that
article in our January
27, 2003 issue of the Market Advisor, which you'll
find in our issue archives. (Please note: Our issue archives are
available only to paid subscribers of our Market Advisor
newsletter.) Since that point in time, the picks we identified have
soared an average of +67.9%, easily
outperforming the S&P 500, which has gained just +28.6%
over the same period. Here's a quick look at the returns delivered by
each of last January's "bargain-basement value plays"...
| Company
(Symbol) |
1/24/03
Price |
Current
Price |
Total
Return |
| China Telecom (CHA) |
$18.96 |
33.60 |
+77.2% |
| CKE Restaurants
(CKR) |
3.67 |
9.00 |
+145.2% |
| Deutsche Telekom (DT) |
13.48 |
17.76 |
+31.8% |
| ESS Technology
(ESST) |
5.87 |
13.70 |
+133.4% |
Valeant Pharma. (VRX)
(formerly ICN Pharmaceuticals) |
10.97 |
23.45 |
+113.8% |
| Imax Corp.
(IMAX) |
3.85 |
6.10 |
+58.4% |
| Insight Comm. (ICCI) |
11.29 |
9.97 |
-11.7% |
| Intermet Corp.
(INMT) |
3.84 |
4.30 |
+12.0% |
| New Century Fin. (NCEN) |
18.62 |
47.06 |
+152.7% |
| PanAmSat Corp.
(SPOT) |
14.05 |
24.25 |
+72.6% |
| SCS Transportation (SCST) |
10.55 |
22.00 |
+108.5% |
| Sonic
Automotive (SAH) |
15.31 |
23.73 |
+55.0% |
| Sony Corp. (SNE) |
41.42 |
41.58 |
+0.4% |
| Steel Tech.
(STTX) |
13.95 |
18.40 |
+31.9% |
| Vesta Insurance (VTA) |
2.67 |
4.25 |
+59.2% |
| Vivendi
Universal (V) |
17.70 |
25.85 |
+46.0% |
| Average
Return for all 16 stocks above |
+67.9% |
| S&P 500 Return
over same time period |
+28.6% |
We've been extremely pleased with the returns that
these value picks have delivered over the course of the last 14 months.
For that reason, in today's issue we decided to revisit that highly
successful screen in search of new value-oriented investing ideas. If
the fresh batch of bargain stocks we've identified today perform even
half as well as the ones we came up with last year using the exact
same screening methodology, then we're certain that you'll be quite
pleased with the results.
|
Please Note: The above article was merely a
small excerpt from an issue of our premium, long-term-oriented investing
newsletter -- the Market Advisor. To receive your copy of
our most recent Market Advisor newsletter, as well as other
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