Money Matters, Simplified.
This Top Stock Is a Winner
Thu, 10/29/2009 - 14:48 by Tim Beyers
Valuation is an imperfect science, but it's as important a concept to fantasy footballplayers as it is to investors. Ask those who added the Giants' Hakeem Nicks off the waiver wire. Nicks, a rookie, caught four balls for 80 yards and a touchdown in Sunday night's 24-17 loss to the Arizona Cardinals.
Value is value, whether you're assembling a fantasy team or a stock portfolio. But don't take my word for it. "Before you make any decision -- who to draft, trade, start, and sit -- make sure you are following that basic principle; how risky is this move, does it give me the best chance to win?" writes ESPN fantasy analyst Matthew Berry in his annual manifesto.
See the parallels here? Winning fantasy players pick-up unloved players for less than market value, and market-beating investors buy oversold stocks for $0.50 on the dollar.
Waiver-wire heroes, unloved stocks ready to rise
These bargain hunters knew that cloud computing wasn't a fad, and that salesforce.com (NYSE: CRM) would recover from its 2008 lows. They've since been handsomely rewarded.
More bargains are out there. For this weekly column, let's use the Motley Fool CAPS screener to find the stock market's version of underrated heroes like Nicks. Here's what we're looking for:
- A minimum $250 million market cap, because we don't draft unsigned free agents.
- A price-to-earnings (P/E) ratio of less than 12, because we're not interested in players that everyone else loves.
- A 10% or better return on equity (ROE), because we want proof that this stock can play at the level we need it to.
- A 10% or worse haircut in price over the past year, because we're bargain hunters. (This is a change to account for the market's massive run-up in the wake of the Wall Street Panic 2008.)
Today's screen returned 72 candidates that could be worthy of filling roster spots in your portfolio. These six possess a track record of superior returns on shareholder equity:
|
Company |
52-Week Price Change |
P/E Ratio |
ROE |
|---|---|---|---|
|
Mirant (NYSE: MIR) |
(12.6%) |
1.0 |
63.5% |
|
Hutchison Telecommunications International (NYSE: HTX) |
(18.4%) |
4.0 |
33.5% |
|
Dean Foods (NYSE: DF) |
(16.1%) |
12.0 |
20.3% |
|
Gulfmark Offshore (NYSE: GLF) |
(11.7%) |
5.4 |
15.9% |
|
Gamestop (NYSE: GME) |
(12.1%) |
10.3 |
15.3% |
|
Enstar Group (Nasdaq: ESGR) |
(15.1%) |
10.3 |
13.5% |
Source: Motley Fool CAPS screen data.
Of these, I'd pick up Motley Fool Global Gains recommendation Enstar Group, a financial services specialist that buys insurance companies that are in "run-off" -- industry-speak for "no longer writing new policies."
Think of Enstar as a junk dealer; it buys distressed assets at a discount, and then puts the cash generated in these transactions to work in other, higher-yielding investments. A history of double-digit returns on equity -- twice in the last three years, for example -- speaks to the success of this strategy.
Yet the stock remains cheap. Enstar trades for roughly 1.4 times tangible book value, appropriate for a slow grower, but not for a company whose per-share tangible book is up 30% in less than two years.
© 2009 UCLICK, L.L.C.
