Over at my premium newsletter, Game-Changing Stocks, we often concentrate mostly on younger companies -- those whose profit-making days are just beginning. But as investors, we cannot ignore inexpensive stocks.
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This month, I'm on the hunt for attractively-valued companies. Some of these bargains might have become cheap because of the recent market volatility, and for some, the attractive valuation would only be an indicator of deteriorating business or other issues. But you won't ever know which one it is unless you start looking.
Because of the many possible ways of defining "attractive" valuation, and because of the wide stock universe, I first needed to set a few restrictions.
Second, among all technology stocks domiciled or listed in the United States, I selected ones with positive EBITDA (earnings before interest, tax, depreciation and amortization) that has increased year over year in the most recent period.
Why EBITDA? As the descriptor implies, this financial measure helps to see how much a company earned before the impact of taxes, interest and accounting for asset depreciation. In other words, EBITDA shows what a company is capable of, regardless of tax-related, borrowing or accounting factors.
And because I screened for companies with rising EBITDA, I could be reasonably sure that the companies on this list have been growing (whether thanks to growth in revenue or improving margins) over the past year.
This first step generated a list of 156 companies. From there, I looked at the 25% of those companies with the lowest trailing P/Es. [Of course, investors determine whether a stock is attractively valued based on its forward P/E (current price divided by expected next-year earnings). I will address this metric as part of the profiles in the analysis that follows.]
This gave narrowed the list to 31 companies -- still too many. At that point, I screened out a few companies with suspiciously low P/Es (anything under a P/E of 3 was taken out of consideration). Because we are looking into the companies' recent pasts, a very low trailing P/E likely indicates slowing expected growth or companies otherwise in some kind of trouble. At this step, four more companies were culled from the list.
As the last step, the remaining 27 companies were sorted by the past year's EBITDA growth, from the highest to the slowest.
Here are the top five:
(Note: Keep in mind that the investing ideas I present here are intended to provide a starting point for further research, not a final recommendation. As with any quantitative tool, my Game-Changing Stocks Stock Screen should not be used in isolation. Please make sure to evaluate fundamental characteristics of every potential investment opportunity to determine if it is a right fit for your portfolio.)
A mid-size software company specializing in payment processing, DXC Technology (NYSE: DXC) has seen the largest jump in EBITDA over the past year. As is often the case for a jump this big (nearly 600% in this case), it's partially due to a low year-ago comparison. But let's not dismiss this number: DXC has moved to grow its business in the cloud and has recently partnered with Amazon Web Services (AWS), the leading cloud provider.
Trading at a single-digit P/E despite flat revenue growth (thanks to strong margins, the company has been growing its per-share profits), DXC looks like a legitimate value stock whose time in this market might still come.
Ultra Clean Holdings (Nasdaq: UCTT), a small-cap semiconductor equipment company, has declined more than 63% year-to-date, largely, it seems, on the weakness in its group. This is an inexpensive stock, trading at a single-digit P/E despite the double-digit expected growth. It looks interesting, too -- just keep in mind that it's a semiconductor company that's very leveraged to the industry's growth trends and subject to related volatility.
SMART Global Holdings (Nasdaq: SGH), too, has declined this year, albeit its 13% drop indicates much better market sentiment than for UCTT. SGH manufactures computer memory used for desktops, notebooks, servers and smartphones. This is a lucrative business, but it's also prone to periodic overproduction and, as a result, is often plagued by supply gluts and declining prices. Still, this company is attractively valued with a forward P/E of less than 5, and its competitive position looks strong, too. SGH is one to watch: Its currently depressed price has the potential to rebound quickly.
Kemet (NYSE: KEM) has been around for a while. Public since 1992, this electronic component company does not look as if it's in a growing (let alone game-changing) business, although the stock, at a forward P/E of 5, is clearly cheap. Plus, we shouldn't ignore the 16% year-to-date stock-price appreciation.
Finally, MKS Instruments (Nasdaq: MKSI), a semiconductor component manufacturer with a forward P/E of 9.5, is the most expensive of the group -- but it's also growing profits at roughly a 12% pace. Down about 30% year-to-date, it looks like a legitimate and potentially attractive value stock.
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