For the time being, I am abstaining from buying stocks to hold long term. That's not to say I'm not tempted, but too many integral components of the US economy, money making publicly traded companies included, are continuing to crack. It seems quite apparent that this earnings season, outside of banks and businesses with real worldwide exposure, has been driven by meager analyst expectations and contraction ("cost-cutting" is too ambiguous a word to use when people are getting laid off at recent rates). Every day of earnings I scroll through is littered with better than expected EPS despite revenues falling short. Huge American businesses (GE, UPS, CRE, most retail stores) are shrinking, and likely for good. Whether Americans are curbing consumption to educate themselves and refocus on societal contribution or they are just curling up in a ball to die remains to be seen, but the worst of the gluttony that has defined recent decades thankfully appears to be behind us.
Big business has proven capable of profiting despite diminished revenues in a recession, so companies have no legitimate excuse for underperforming in the current environment outside of "the consumer just ain't buyin'." Cost cutting is the name of the game and if revenues meet expectations, profits should beat them. People aren't looking for new things to buy, they're looking to eliminate some expenses and save on others. Corporations with any tact have advertised, if much at all, value more than style and generally counted on customer loyalty.
The Price/Sales ratio measures the relationship between a company's value and annual revenue. Of course this metric ignores efficiency, which is why so many unprofitable companies have favorable (low) P/S values. In today's environment, however, companies are trimming fat at impressive rates and profitability should be expected where cash is generated. The following stocks all have highly favorable P/S values relative to their sector and operate profitably.
China Bio Energy (CBEH): Chinese oil companies of all shapes and sizes are way undervalued. Almost 50% more cars are being sold in China this year than were last. Commerce is expanding and people are commuting more, it's very simple logic. CBEH, a refinery that recently entered the distribution market, adds value to oil and gas regardless of raw prices. Revenues were $216M in 2008 with $30M EBITDA and 65% year over year revenue growth in Q1 FY09. The Company is valued under $160M.
Petro China (PTR): China's Exxon Mobil (XOM) might trade at an average P/E ratio, but it brings in six times its valuation, the PRC has its back (a requirement for any China investment) and growth is not in question.
Versar (VSR): This small infrastructure firm has profited each of the last for years and almost doubled revenues from $60M to $115M from 2006 to 2008. A P/E ratio just over 12 may not seem like a bargain, but continued growth in public and private sectors make this $35M company appear awfully cheap.
ONEOK Partners LP (OKS): This natural gas partnership pays a hefty dividend near 9% and trades at a trailing P/E under 10. OKS trades at only 3/8ths of last years revenue.
Veolia (VE): Despite massive leverage and less than stellar margins, this infrastructure leader is highly integrated in every continent. VE trades at a P/S near 1/3 and is poised for growth, particularly in Asia.
Gigamedia (GIGM): Everest Poker's parent company recently added 2M shares and has taken a 20% hit, which caused me to take another look at this former holding. I will likely buy back in promptly, largely because Everest is a major sponsor at the 2009 World Series of Poker, which hasn't yet aired on tv. Q1 FY09 was down yet earnings remained positive. GIGM also has several online games that are popular in Asia and trades at a P/S near 1 in a highly valued industry.
Disclosure: Long VE, GIGM, PTR