Value Line is regarded as the best independent research available. More than just recommendations, Value Line provides the rationale behind its picks for greater understanding.
- Don D., California
Stock Screen: Bargain Basement Stocks – January 5, 2011
The investing world is often broken down into two broad camps: growth and value. The growth group looks for companies with earnings that are advancing at a material clip. The value camp, meanwhile, looks for stocks that are trading on the cheap. The desire to find cheap stocks is both emotionally and intellectually appealing—after all, who doesn’t like to take advantage of a sale? Moreover, value investing follows one of the oldest, and most obvious, sayings on Wall Street, “buy low, sell high.”
The problem is that everyone is trying to buy low and sell high, even the growth investors. So it’s important to properly define “cheap” and have a systematic way of identifying candidates that meet that criteria. Equally paramount is remembering that some merchandise winds up on the sale heap because it is damaged in some way. A fact that is as true for stocks as it is for consumer goods.
To help investors cull through the list of potential investments, Value Line provides weekly screens. One of the more useful screens for value investors is the Bargain Basement Stocks screen. The screen is fairly simple, highlighting companies with price to earnings multiples and price to “net” working capital ratios near the bottom of the Value Line universe. The idea is to identify companies that are trading cheaply relative to earnings and to the money that would be “left over” if the company were to be liquidated. Note that most stocks never trade below their liquidation value, but even trading at two or three times that value is noteworthy.
This screen is available every week in the Index section of The Value Line Investment Survey. Some recent names of interest that percolated to the top, or the bottom as the case may be were Ingram Micro, Inc. (IM), MKS Instruments (MKSI), and Neutral Tandem, Inc. (TNDM).
Ingram Micro, Inc. Ingram Micro is a worldwide distributor of computer products and related services. The company’s information technology (IT) products include peripherals, systems, software, and networking. It also provides ancillary services, such as supply-chain solutions, technical support, and financial services. Ingram distributes its products in over 100 countries. Foreign sales accounted for 58% of total revenues in 2009.
In 2010, the computer-product distributor likely realized double-digit earnings growth, following a challenging operating landscape in 2009. The near-term environment has been steadily mending, due to improved IT spending in the company’s mature markets, such as North America and Europe. Indeed, with the recession now officially over, customers are in a more generous spending mood. In addition, underdeveloped markets, such as the Asia/Pacific region (particularly China), have boosted Ingram’s near-term performance. And the long-term picture appears bright, too. The company is expanding into non-core categories, such as smartphones and tablets, thereby augmenting its product portfolio. The stock may intrigue investors looking for a bargain because the company has solid growth prospects and a healthy balance sheet, which indicates that acquisitions are likely on tap. Yet, the stock has a low relative P/E ratio in comparison to other issues, making it attractive at current levels.
MKS is a global developer, manufacturer, and supplier of instruments and process control solutions used to measure, control, and analyze gases used in semiconductor manufacturing. Its products include vacuum-measurement instruments and valves. Foreign sales represented 44% of total revenues in 2009.
Positive investor sentiment for MKS Instruments is evident, as the stock price continues on an upward trend. Yet, the equity still maintains a low relative P/E ratio, making it something of a bargain stock. The company has several favorable short- and long-term growth avenues, which should enable earnings to advance at a high single-digit percentage clip this year and at a double-digit pace over the next three to five years. Expansion avenues include a diverse and growing portfolio, which now encompasses newer devices, such as tablets and smartphones. As these products grow in popularity, they ought to complement other equipment in the company’s line up. In addition, new contracts and the growing prominence of underdeveloped markets represent solid growth platforms.
Neutral Tandem, Inc.
Neutral Tandem provides tandem interconnection services primarily to competitive carriers that include wireless, wireline, cable, and broadband telephony companies in the United States. The company manages network capacity between its tandem switches and customer switches, which results in increased network quality and reduced cell blocking.
The company has favorable short-term catalysts that ought to drive healthy earnings growth in 2011. Indeed, Neutral Tandem’s growth agenda is being driven by acquisitions, with a recent purchase likely enabling the company to capture greater market share in Italy. Geographic expansion is also being sought via the globalization of the company’s Ethernet exchange business.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.