Stocks had quite a first quarter, but the second quarter has pared some of those gains...yet there are still good buys if you know where to look, writes John Reese of Validea Hot List.
The market is still pretty close to fair value. There are other issues that may be impacting the valuation picture, but it seems that for every negative the bears can point to, the bulls can point to an equally persuasive positive factor.
For example, while bears have noted that profit margins are quite high compared to historical standards, which may be goosing earnings numbers, the bulls can point to the ten-year P/E ratio being skewed by the atrocious earnings of only a couple of big financial firms in 2008 and 2009—some of which aren't even in the S&P 500 index anymore.
The fact that there are some persuasive arguments on both sides lends credence to the notion that we are somewhere in the fair value range.
More importantly to me, a myriad of quality stocks are trading at very attractive prices, offering lots of opportunities for stockpicking systems like the Hot List. For example, The TJX Companies (TJX), which is the parent of discount retailers TJ Maxx and Marshalls, has a return on equity of 47%, and nearly three times as much net current assets as long-term debt.
The firm has increased earnings per share in every year of the past decade, and has been growing EPS at a 21.5% annual pace over the long-term (that's using an average of the three-, four-, and five-year EPS growth rates). Yet it trades for about 1.3 times sales—a very reasonable figure—and has a P/E-to-growth ratio just under one, a sign that it's a good value.
Then there's Bridgepoint Education (BPI). Many investors have dumped for-profit education stocks as they've come under increased regulatory scrutiny over the past year or two. But Bridgepoint has kept on performing.
It increased earnings-per-share by 41% last year, and revenue by 31%. The firm has a return on equity of 58%, no long-term debt, and a free cash flow yield of 15.4%. All of that, and it trades for just 7 times trailing 12 month earnings, about 1.2 times sales, and has a PEG ratio of about 0.2.
Finally, consider the lone financial in the portfolio right now, Cash America International (CSH). While the past decade has been a rough one for many financial firms, this Texas-based pawn loan firm has excelled, increasing EPS every year, and posting long-term EPS and sales growth rates of about 15% (again, based on an average of the respective three-, four-, and five-year rates).
It has an equity/assets ratio of 54%, and a return on assets rate of 8.7%. To give you an idea of how good that is, my Peter Lynch-based method uses targets of 5% for the equity/assets ratio and 1% for return on assets.
But despite all that, Cash America is very cheap. It trades for 10.1 times trailing 12 month earnings and 0.82 times sales. That's the sort of high-quality, bargain-priced stock that the Hot List loves.
Subscribe to Validea Hot List here...
Related Reading:
Is it a Bird? A Plane? No, it's a UAV!
