By Matt Doiron
Value analysis often starts with looking for stocks which are cheap in terms of their actual, historical performance - namely the trailing price-to-earnings multiple. Of course, this metric itself is not a guide to value stocks as it does not account for how a company's future earnings might be higher- or lower- than what it has earned in the past. One way to find stocks which may have high growth prospects is to see what Wall Street analysts expect the company's growth rate of earnings per share to be next year. While analyst forecasts aren't always correct, looking for stocks meeting this criterion can serve as a starting point for further analysis. Using data from Fidelity, here are five stocks which currently trade at less than 16 times their trailing earnings and which are expected to report at least 50% higher earnings per share next year than this year:
The sell-side expects earnings per share to more than double in 2014 over this year's figures at Golar LNG (GLNG), to a total of $2.89. The company transports liquefied natural gas; it owns six ships for this purpose itself and operates seven others. We would note that adjusted EPS has been considerably lower than analyst expectations in Golar LNG's last two quarterly reports. The thesis here, we suppose, is that the development of more natural gas infrastructure in the United States will unlock the opportunity for companies such as Golar to export LNG to countries with higher natural gas prices.
Offshore drilling contractor Diamond Offshore Drilling (DO) also makes our list. While revenue and earnings both declined last quarter compared to the first quarter of 2012, analysts expect high growth next year (as they do for many other offshore drillers). With Diamond valued at only 13 times trailing earnings, we think it and some other industry players are worth further research. Hedge funds file quarterly 13F filings several weeks after the end of each quarter, disclosing many of their long equity positions; we track these filings as part of our research on investment strategies (for example, we've found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year). We can see from our database that Renaissance Technologies, founded by billionaire Jim Simons, owned 2.5 million shares of Diamond at the end of March (find Renaissance's favorite stocks).
After struggling this year, analysts are forecasting substantial improvements on the bottom line at $2.1 billion market cap oil and gas equipment and services company McDermott (MDR). McDermott does a good deal of business related to engineering and construction of offshore oil and gas projects; between it and Diamond, analyst sentiment seems highly bullish on offshore drilling activity. The projected increase means that McDermott trades at only 10 times forward earnings estimates. Billionaire Israel Englander's Millennium Management increased its stake to a total of nearly 6 million shares during Q1 (see Englander's stock picks).
First Majestic Silver (AG), after falling 36% in the last year, features a market capitalization of $1.1 billion and a stock price equal to 12 times its trailing earnings. Analyst expectations are for EPS to increase considerably next year - presumably as the market for precious metals improves - and so the forward earnings multiple falls all the way to 7. Obviously, the company would be a buy if that turned out to be correct, but for the past four quarters in a row, First Majestic has turned in earnings results that underperformed consensus forecasts. Silver is certainly a risky investment as well.
Also meeting our criteria is Commercial Metals (CMC), a $1.7 billion market cap provider of steel and processor of scrap metals. It's another company which has not measured up well against analyst expectations in the past, and so while the forward fiscal year (which ends in August 2014) is expected to see high growth in earnings per share, we would be cautious. Revenue and earnings declined at double-digit rates in its most recent quarter compared to the same period in the previous fiscal year. With demand for many of Commercial Metals' products being sensitive to the overall economy, the stock's beta is 1.9.