Cheap stocks aren't as plentiful as they were seven months ago.
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 expected growth.
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.
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 matches.
Price-to-free cash flow, sometimes painfully shortened to P/FCF, compares a company's market cap with the amount of free cash it generates.
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%.
faren better, they actually pay much more.
|Company (Ticker)||Yield||PEG Ratio||P/S||P/E||P/B||P/FCF||Market Cap|
|Penn Virginia Holdings
|Himax Technologies (Nasdaq: HIMX)||10.3%||0.8||0.8||13.1||1.3||5.1||$534M|