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 Comtech Telecommunications (CMTL), Standard Motor Products (SMP), and Blyth (BTH).
Comtech Telecommunications Corp. designs, develops, and markets innovative products, systems, and services for advanced communications solutions. It conducts its business through three complementary segments: Telecommunications Transmissions (28% of net sales); Mobile Data Communications (57%); and RF Microwave Amplifiers (15%).
Comtech posted a mixed performance for the January quarter (fiscal years end in July). The top line declined somewhat, as challenging market conditions resulted in lower sales in the Mobile Data Communications and RF Microwave Amplifier segments. This was partly offset by growth in the Telecommunications Transmission unit. Nonetheless, earnings per share of $0.52 were slightly above the year-earlier tally, as Comtech benefited from a decline in expenses and a lower number of shares outstanding.
Looking forward, Value Line analyst Michael Napoli, CFA believes that some weakness will likely persist in the near term. Though he expects solid performance, revenues and share net in the third and fourth quarters will probably compare unfavorably with the impressive results registered in the second half of last year. That said, Mr. Napoli thinks that long-term industry prospects appear solid, and he anticipates continued healthy demand for information and communications technologies from governments and militaries across the globe. In addition, Mr. Napoli feels that private-sector spending should continue to improve over time, which ought to result in many of the company's product lines benefiting from slowly improving business conditions.
Standard Motor Products
Standard Motor Products manufactures automotive replacement parts under the brand names Standard, Blue Streak, and Four Seasons, as well as under private labels to select customers. Its Engine Management division (71% of 2010 sales) makes ignition, emission, and fuel-system parts, while the Temperature Control business (27%) produces heater and air-conditioner parts.
Standard Motor Products has been holding up well. The auto parts distributor posted a 10% increase in revenue last year, driven by an industrywide recovery. However, Value Line analyst Adam Rosner thinks that top-line gains will probably be a bit more subdued in 2011, though demand for aftermarket auto parts should still remain healthy, thanks to an aging car population and the continued consolidation of new auto dealerships.
Meanwhile, the bottom line is making progress, as the company has successfully controlled costs. The operating margin was about 7.5% at the end of 2010, versus only 5.1% a year earlier, and Mr. Rosner sees room for improvement in 2011, as the company continues to reorganize its manufacturing operations, switching production to lower-cost locations.
Blyth, Inc. designs and markets an extensive line of candles and home decor products, including scented items, seasonal decorations, and home convenience products. It distributes its products in North America, Europe, and the Asia/Pacific region via three main channels: Direct Selling (66% of fiscal 2009 revenues), Wholesale (18%), and Catalog & Internet (16%).
Value Line analyst Orly Seidman thinks that Blyth had a mixed fiscal fourth quarter (results for that period, ended January 31, 2011, are not yet available), but should get back on track in fiscal 2011. Even though she believes that business conditions will improve over the course of the next few months, the candle maker may still suffer due to the lingering impact of earlier struggles and still skittish consumers. Too, Ms. Seidman feels that higher input expenses may continue to pressure margins and that the inflationary cost environment may well persist over the next few months. Nonetheless, Blyth has been restructuring its Midwest-CBK business to improve productivity at its seasonal home decor business. And, recent improvements, coupled with tighter inventory management, should help bolster bottom-line results in the coming quarters. Furthermore, Ms. Seidman notes that management's ongoing cost-cutting measures ought to widen operating margins. In all, she believes that revenues and share earnings ought to bounce back by a mid single-digit percentage this fiscal year.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.