12 Cheap Growth Companies

The market has spoiled investors over the past 7 months with one direction only: up. This Great Recession seems to turn into the Great Recovery. Are there any cheap growth stocks left for bargain-hunting investors?

I use following 8 criteria to select undervalued growth companies:

1. PE/Growth <1

A lower PE/G means that the stock is more undervalued.

2. P/E and Forward P/E both <20

3. Revenue Increased in the Most Recent Quarter

Profits grow might be through cost-cut. Sales-growth matters.

4. Price/Sales < 2

Enron had been named as “America’s most innovative company” by Fortune magazine for 6 years in a row. However, it turned out that the company had used creative accounting tricks to inflate its results. Sales usually don’t lie.

5. Entity Value/Free Cash Flow (FCF) <10

Many companies do not have positive free cash flow as they are investing heavily to rapidly grow their business. Companies with small cash reserves will suffer most from a potential resumption of the liquidity crunch.

6. Debt/Operation Cash Flow <5

Great companies generally don’t load up their balance sheets with debts. Memories are too fresh of what had happened in the dot com bubble, when companies such as WorldCom and Global Crossing had collapsed under their heavy debt burden.

7. Market Cap >$500 million

8. Short Ratio <5

Followings are 12 such companies (sorted by PE):

Name	Symbol	P/E	P/S	PEG	Debt/Operating CF	Mkt Cap
HUMANA INC	(HUM)	7	0.2	0.6	1.8	6.37B
CAL DIVE INTL	(DVR)	8	1.0	0.8	1.7	936M
UNITEDHEALTH	(UNH)	9	0.4	0.9	2.4	30.05B
WELLPOINT INC.	(WLP)	10	0.4	0.9	3.1	21.87B
LOCKHEED MARTIN	(LMT)	10	0.6	0.9	0.9	27.58B
AETNA INC. NEW	(AET)	10	0.3	0.7	1.9	11.38B
L-3 COMM HLDGS	(LLL)	10	0.6	0.9	3.5	8.68B
RAYTHEON CO	(RTN)	11	0.8	0.9	1.1	18.08B
ASSURANT INC	(AIZ)	11	0.5	0.9	2.5	3.67B
STANCORP FINCL	(SFG)	13	0.7	0.9	1.8	1.94B
Endo Pharmaceuticals	(ENDP)	13	2.0	0.9	1.1	2.73B
OMNICARE INC	(OCR)	17	0.4	0.7	4.7	2.72B

They are in 3 sectors: Healthcare (healthcare plans, insurance and drug), Defense and Oil & Gas Equipment.

HealthCare Plans

Aetna (AET), Humana (HUM), Unitedhealth Group (UNH) and WellPoint (WLP) are healthcare services providers. This sector has lagged the market by a wide margin this year.

The reality is that America is aging. People need more healthcare services. Single digit P/E is one of reasons why Warren Buffett owns shares of UnitedHealth and WellPoint. But you have the overhang of health-care reform to worry about: there are so many aspects remain open to debate.

Following charts show revenue over the last 4 years for these companies (in $billion):

Health Insurance

Assurant (AIZ) and StanCorp Financial (SFG) are Accident & Health Insurances. The $829 billion health reform plan would require Americans to obtain insurance yet impose restrictions on insurance companies from denying coverage on pre-existing conditions. There could be a big upside for insurers if more uninsured Americans are forced or given incentives to buy health insurance.

Drug Companies

Omnicare (OCR) is a geriatric pharmaceutical services company while Endo Pharmaceuticals (ENDP) is a drug manufacturer. Regardless of the outcome of healthcare reform, the effect on drug makers probably will be negligible.

Health Care Select Sector SPDR (XLV) and Pharmaceutical HOLDRs (PPH) are 2 largest ETFs in this sector.

Defense

L-3 Communications (LLL), Lockheed Martin (LMT) and Raytheon (RTN) all belong to defense sector. Investors are concerned that the defense industry will underperform as the U.S. spends less on fighter jets and warships, especially since Obama won the Nobel peace prize.

Raytheon’s large exposure to foreign markets and focus on high-demand areas of defense electronics might insulate it from drop off in US defense spending.

Oil & Gas Equipment

Cal Dive International (DVR) provides marine construction services to offshore oil and natural gas industry. Its sales almost quadrupled over the last 4 years: form 2005’s $224 million to 2008’s $857 million.

ETFs

With its potential for timely and ultra-targeted offers, Google’s (GOOG) new Wave application could potentially be a social media killer.

Facebook’s progress as a marketing tool might be diminished by Google Wave. It is hard to predict tomorrow’s winner.

ETFs address this issue. Followings are 10 biggest growth ETFs by assets:

Fund Name	Ticker	Category	P/E	Earnings Gr Rate
PowerShares QQQ	(QQQQ)	Large Growth	20.2	14%
iShares Russell 1000 Growth	(IWF)	Large Growth	16.8	12%
iShares S&P 500 Growth	(IVW)	Large Growth	16.8	11%
Vanguard Growth ETF	(VUG)	Large Growth	16.4	12%
iShares Russell Midcap Gr	(IWP)	Mid-Cap Gr	17.9	14%
iShares S&P MidCap 400 G	(IJK)	Mid-Cap G	18.3	12%
iShares Russell 2000 Growth	(IWO)	Small Growth	19.0	16%
iShares S&P SmallCap 600	(IJT)	Small Growth	17.9	14%
Vanguard Small Cap Growth	(VBK)	Small Growth	16.7	15%
iShares MSCI EAFE Growth	(EFG)	Foreign Gr	16.7	46%

With P/E over 20, it is a lot risky to buy QQQQ now than 8 months ago, when I first recommended it in my March 1, 2009 article. Nonetheless, there is nothing wrong to “buy high’, as long as you can “sell higher”.

Conclusion

Double-dip recession can't be completely ruled out. The market could remain volatile and even irrational in the short run as investors struggle to discern the direction of the economy. For investors, the key is to find great companies at reasonable prices and not get mired down in short-term fluctuations. One of the smart ways is not to invest more than 5% of your portfolio in any single stock.

Disclose: I have long positions on RTN, PPH and QQQQ. All data is from Yahoo Finance as of Oct 23, 2009.

Comments

[Uncle Pie:]

Healthcare in America is about 35% more costly per capita than it is in other developed countries because the health insurance oligopoly marks up the cost of health care by that much. Take a look at the income statement of any of these companies. You'll find that about 2/3rds of revenue goes to pay for actual health care (ie. claims) and the other 1/3rd goes for overhead, executive compensation, dividends to shareholders, etc. It's not hard to connect the dots. Trouble is, such a costly system makes our labor costs non-competetive, and leaves 48 million people without access to healthcare. The whole system is on the verge on collapse which is the only reason the politicians are paying any belated attention to the issue. I'd think twice before investing in health insurance companies like WLP or AET or AIZ or HUM and am not surprised by the low p/e ratios as their business model is not long for this world. Health care costs per capita in Canada are 1/3rd lower than ours and Canadians have a longer life expectancy, according to figures in The Economist magazine and elsewhere. Number of health insurance companies in Canada: Zero.

Oct 25 12:20 PM

[Peter Mycro...:]

Nice Job, but I would not classify the list as growth plays but rather value plays. I say this because, though they have very attractive Price to Free Cash Flow (PFCF) numbers, their Free Cash Flow Return on Invested Capital (FROIC) is about average. I would only classify LMT as a growth play as it has a FROIC of 34.54%.

When investing I look for PFCF below 15 times and FROIC above 20%+. When you are lucky enough to find a combination of the two you find a perfect balance of growth + value and you get capital appreciation through capital preservation.

For those who don't know;

PFCF =Market Price/ (Cash flow per share-Capital Spending per share)

FROIC = FCF per share/ (long term debt per share + shareholders equity per share)

FROIC basically tells you how much return in free cash flow a company generate for every dollar of Total Capital they employ.

I consider FROIC the primary determining factor in identifying growth companies as you can compare every company (except financial's) on an equal basis. The question I ask every company I analyze is = how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest.

As you will see I have analyzed your list from a FROIC point of view below;

HUMANA INC (HUM)

FCF PS = $5.75
TCAP PS = $47.35
FROIC = 12.14%
PRICE TO FCF = 6.53

CAL DIVE INTL (DVR)

FCF PS = $0.90
TCAP PS = $9.56
FROIC = 9.40%
PRICE TO FCF = 11.18

UNITEDHEALTH (UNH)

FCF PS = $3.75
TCAP PS = $33.54
FROIC = 11.18%
PRICE TO FCF = 6.89

WELLPOINT INC. (WLP)

FCF PS = $6.70
TCAP PS = $72.98
FROIC = 10.89
PRICE TO FCF = 6.87

LOCKHEED MARTIN (LMT)

FCF PS = $8.00
TCAP PS = $23.16
FROIC = 34.54%
PRICE TO FCF = 9.02

AETNA INC. NEW (AET)

FCF PS = $3.35
TCAP PS = $30.69
FROIC = 10.91%
PRICE TO FCF = 7.78

L-3 COMM HLDGS (LLL)

FCF PS = $8.40
TCAP PS = $90.00
FROIC = 9.33%
PRICE TO FCF = 8.86

RAYTHEON CO (RTN)

FCF PS = $5.45
TCAP PS = $33.33
FROIC = 16.35%
PRICE TO FCF = 8.52

ASSURANT INC (AIZ)

FCF PS = NA
TCAP PS = NA
FROIC = NA
PRICE TO FCF = NA

STANCORP FINCL (SFG)

FCF PS = NA
TCAP PS = NA
FROIC = NA
PRICE TO FCF = NA

Endo Pharmaceuticals (ENDP)

FCF PS = $2.25
TCAP PS = $17.06
FROIC = 13.18%
PRICE TO FCF = 10.34

OMNICARE INC (OCR)

FCF PS = $3.50
TCAP PS = $50.42
FROIC = 6.94%
PRICE TO FCF = 6.50

FROIC gives me a real return on Main Street and if I can get a 20%+ return on Main Street and at the same time buy a stock that is selling for less than 15 times its FCF then there is a very high probability that it should be very successful investment.

By choosing 20%+ as my minimum FROIC I have built a portfolio of 29 holdings for my clients that has a combined portfolio FROIC of 32% and sells as a group for 12.35 PFCF.

As for PFCF I came up with the 15 or less number as being Ideal after performing a 58 backtest. To view the backtest just click the link below.

mycroftresearch.com/up...

Disclosure Long LMT No Position in the others

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter "Mycroft" Psaras, and should not be construed as personalized investment advice.
It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oct 25 01:02 PM

[stemcella:]

I have added "KOOL" on my portfolio recently., A micro cap but huge growth going forward. A solid play on new frontier - regenerative medicine. Ample cash no debt, profitibility is to commence this quarter. The clear leader in adult stem cell processing and cryo-preservation device company.

Oct 25 03:40 PM

[mbkelly75:]

Another nicely done article with some good ideas from everyone. I do agree with the first commenter though. It seems more a value list than a growth list. However, that is not a bad thing from my standpoint. I like value plays more than straight growth plays anyway.
Two things about using PEG that you might keep in mind:
1) <1 does not narrow it down quite enough. I use .5 or less to be a Buy signal, .5 - .65 = a signal to probably hold or maybe buy if everything else is attractive, .65 - 1.0 = Hold rather than Buy.
2) PEG is much better than PE alone, but it is still based on Earnings which have been less than reliable since Enron. I find Price/Sales to be much clearer to use for quick judgments of a stock and for that purpose - P/S < 1 works well and can point out stocks that are over-valued even with a low PE or PEG.
Thank you to Peter for his sharing of the Free Cash Flow ideas. I will keep them in mind for future use. By my own criteria - here is my view of this list.

HUM has P/S of 0.21, PEG of 0.67, Quick Ratio of 1.60 (>1 is good), a P/FCF of 7.50 and P/C of 1.03 so it has darn near as much cash /share as the stock’s value so it looks REAL good to me right now. They made a Golden Cross on 7 August and have been trending up since.

DVR has P/S of 0.93, PEG of 0.64, Quick Ratio of 1.55, P/FCF of 6.29, and a P/C of 10.76. They made a Golden Cross on 3 April and have been trending up since.

UNH has P/S of 0.35, PEG of 0.74, Quick Ratio of 0.88, P/FCF of 5.70, and a P/C of 2.86.

WLP has P/S of 0.36, PEG of 0.85, Quick Ratio of ----, P/FCF of 8.42 and a P/C of 12.68.

LMT has P/S of 0.63, PEG of 0.98, Quick Ratio of 0.89, P/FCF of 9.24 and a P/C of 10.15. Now they have a nice dividend of 3.49% and that makes them a standout (I look for >=3%)with a 5 year average annual growth rate of that dividend of 25.16%. Now from a dividend point of view - they are doing well. They have raised the dividend for 6 years in a row now (5+ years is what I look for), payout ratio = 37% which makes it sustainable and they do not go X-Div until 27 Nov. They formed a Death Cross on 15 Oct and are trending down but are worth keeping an eye on. If they form a Golden Cross and start trending up before they go X-DIV - they would be an outstanding dividend-capture play.

AET has P/S of 0.35, PEG of 0.77, Quick Ratio of ----, P/FCF of 5.55 and a P/C of 9.42

LLL has P/S of 0.57, PEG of 0.90, Quick Ratio of 0.76, P/FCF of 9.62 and P/C of 9.67

RTN has P/S of 0.74, PEG of 0.99, Quick Ratio of 0.59, P/FCF of ---- and P/C of 7.40

AIZ has P/S of 0.43, PEG of 1.22, Quick Ratio of ----, P/FCF of 13.65, and P/C of 4.54

SFG has P/S of 0.71, PEG of 1.24, Quick Ratio of ----, P/FCF of -----, and P/C of 9.41

ENDP has P/S of 1.99, PEG of 1.23, Quick Ratio of 1.63, P/FCF of 6.01 and P/C of 5.24

OCR has P/S of 0.43, PEG of 1.29, Quick Ratio of 3.51, P/FCF of 6.58 and P/C of 9.93. They are both under-valued and only 19.42% off their 52 Week Low (<20% is good from a bottom-fisher viewpoint) They just might be a good trading stock. More checking shows that they formed a Death Cross with their Moving Averages on 3 August and have been heading down since. They might make a short but not a buy right now.

Of the 12 stocks, only 2 are worth buying now (HUM and DVR) with LMT enough of a standout to bear watching for investment later on. OCR might actually be worth a Short Sale but not buying as an investment at this time. The other stocks all have at least one problem that takes them completely out of the running at this time.

Oct 25 06:45 PM

[TheSnail:]

Run a stock screen and then throw your money at stock's you have no history of following.

Get back to me after you followed these stocks for a year.

Until then I will be playing the game of darts, not throwing golden darts at the market.

Oct 26 02:13 AM

[MJJP:]

Here is a link to how bad it really is.

www.reuters.com/articl...

On Oct 25 12:20 PM Uncle Pie wrote:

> Healthcare in America is about 35% more costly per capita than it
> is in other developed countries because the health insurance oligopoly
> marks up the cost of health care by that much. Take a look at the
> income statement of any of these companies. You

Oct 26 08:22 AM

[mbkelly75:]

So far this year, my trading stock portfolio is up 340% and that is from trading stocks that screening has pointed out to me and more Due Diligence afterwards has confirmed the possibility of making a successful trade - either up or down - buying or shorting. For example, OCR might make a good short right now. If you take the cash made from shorting and use it to buy when a Golden Cross is formed - you can make money going back up also on a stock that IS undervalued right now. You can make money BOTH ways over the course of a full year or just keep track of them and buy when they form the Golden Cross and selling your position out for cash when a Death Cross forms. Either way works well. Short selling is more aggressive but not wrong.


On Oct 26 02:13 AM TheSnail wrote:

> Run a stock screen and then throw your money at stock's you have
> no history of following.
>
> Get back to me after you followed these stocks for a year.
>
> Until then I will be playing the game of darts, not throwing golden
> darts at the market.

Oct 26 08:42 AM

[Adonis:]

Goog article, I also like the addition of Price to Free Cash Flow. The only comment I have is, by looking only at companies where their PE is below 20 you take out a lot of good technology stocks. I take a ratio of their current PE/3 YR historical PE, and look for anything under 1. This also gives insight to possible value.

Oct 26 09:05 AM

[Windsun33:]

The latest versions (changing minute by minute by the spin doctors) of the health "reform" bills would seem to put the shaft to the insurance companies, so not sure I would put anything into them right now.

Raytheon and Lockheed are very subject to which lobbyist just paid Congress the most, so that could change up or down rapidly. The latest flap is over the F35 "alternative engine" fiasco, but that appears to be a Pratt & Whitney vs GE thing for the moment.

Oct 26 09:47 AM

[The Geoffster:]

What do you think the overhead will be with a government bureaucracy and how will Americans react to being told that they can't have that MRI or intestinal bypass?


On Oct 25 12:20 PM Uncle Pie wrote:

> Healthcare in America is about 35% more costly per capita than it
> is in other developed countries because the health insurance oligopoly
> marks up the cost of health care by that much. Take a look at the
> income statement of any of these companies. You'll find that about
> 2/3rds of revenue goes to pay for actual health care (ie. claims)
> and the other 1/3rd goes for overhead, executive compensation, dividends
> to shareholders, etc. It's not hard to connect the dots. Trouble
> is, such a costly system makes our labor costs non-competetive, and
> leaves 48 million people without access to healthcare. The whole
> system is on the verge on collapse which is the only reason the politicians
> are paying any belated attention to the issue. I'd think twice before
> investing in health insurance companies like WLP or AET or AIZ or
> HUM and am not surprised by the low p/e ratios as their business
> model is not long for this world. Health care costs per capita in
> Canada are 1/3rd lower than ours and Canadians have a longer life
> expectancy, according to figures in The Economist magazine and elsewhere.
> Number of health insurance companies in Canada: Zero.

Oct 26 10:20 AM

[petyaczar:]

Like the general valuation process, do not like the specific outcomes.

Also I'd add variables relating to
Dividend yield and Return on Equity

I'd get rid of short ratio <5

Personal preference.

Oct 26 11:34 AM

[bbowen7:]

Somehow the health care debate has become about insurance companies - and I agree that their future profitability is questionable. But there will be no improvement in the overall cost to America until we align the decision about what procedure/medication to buy with the person paying the bill. Neither company-paid nor government-paid insurance does that.

Oct 26 12:34 PM

[TeresaE:]

Telling people to buy insurers, who currently operate on an average 4-5% profit and soon will be hit with across the board "windfall" taxes AND forced by gunpoint customers (of which half, or more, will be instant users - not pay but don't use), doesn't seem to be prudent until we can read and analyze how the destruction in WDC will play out.

Then you tell people that pharmaceuticals are not going to go anywhere, yet the industry is being gifted a green light from Obama, mandatory & government paid vaccine revenue AND 25 million new customers. Care to explain the "blip" of their substantial profit & sales increases after Congress "helped" seniors a couple years ago?

Pharms stand to be the ONLY winners (other than the paid-for-life employees in FIFTY-THREE new government departments) in the health care fiasco.

Especially when you realize that 50% of the adult population is on a daily medication.

12.5 million, new customers paying with taxpayers and insurance companies money - not their own earnings - and you don't think that is going to impact pharm's future revenues in any material way?

This is why "reform" is going to destroy us. No one realizes reality and the costs that will rain down upon us.

Oct 26 02:10 PM

[DudeKabob:]

You mean the government telling someone they can't have a certain procedure as apposed to an insurance company telling them they can't have the procedure and that, by the way, "we've just cancelled your policy?"

You people who are against health care reform I fear have been waterboarded one too many times. Get real, and pull your heads out of the collective insurance industry shoveled sand (or whatever that is they're shoveling).


On Oct 26 10:20 AM The Geoffster wrote:

> What do you think the overhead will be with a government bureaucracy
> and how will Americans react to being told that they can't have that
> MRI or intestinal bypass?

Oct 26 04:31 PM

[rennert:]

Aetna's Ceo just made 24 million this year. Not bad for the old boy.The latest CoolAid is unemployment. I see no unemployment here. I tried to get people to do handy man work and other jobs like pluming and tree trimming. No one has time. Everyone is so busy with work here on the West Coast of Florida.
Last year it was different but this year everyone on my street is working. There are no houses for sale on my street either. I think they are trying to make us think things are so bad so no one has the nerve to raise interest rates. At least 1% would sure help the dollar but that is exactly what those Greedy Financiers do not want,. They want to play Casino with a week dollar. While Inflation is already everywhere. Have you ben to the Doctor lately or taken Fido to the Vet??? Milk and Food also climbing Mount Everest.

Oct 26 08:38 PM

[Freund:]

The quant screens love the health insurers too. Quants seemed to have it too easy pre crash. Now not so much. I say hail to the quants when everyone else has given up the models.

Oct 27 02:25 AM

[MikaelR:]

Anyone know what happened to LMT's book value? The company seems to have lost ~75% of its book value in Q4 '08.

Oct 27 12:28 PM

[grey road:]

This is precisely correct , and is the reason why no one in there right mind would buy into these insurers...for those of you who put thumbs down to this , wake up... its coming.

On Oct 25 12:20 PM Uncle Pie wrote:

> Healthcare in America is about 35% more costly per capita than it
> is in other developed countries because the health insurance oligopoly
> marks up the cost of health care by that much. Take a look at the
> income statement of any of these companies. You'll find that about
> 2/3rds of revenue goes to pay for actual health care (ie. claims)
> and the other 1/3rd goes for overhead, executive compensation, dividends
> to shareholders, etc. It's not hard to connect the dots. Trouble
> is, such a costly system makes our labor costs non-competetive, and
> leaves 48 million people without access to healthcare. The whole
> system is on the verge on collapse which is the only reason the politicians
> are paying any belated attention to the issue. I'd think twice before
> investing in health insurance companies like WLP or AET or AIZ or
> HUM and am not surprised by the low p/e ratios as their business
> model is not long for this world. Health care costs per capita in
> Canada are 1/3rd lower than ours and Canadians have a longer life
> expectancy, according to figures in The Economist magazine and elsewhere.
> Number of health insurance companies in Canada: Zero.

Oct 28 08:06 AM

[ArtfulDodger:]

PP:
That is what I call carrying out the proper research (DD) to find excellent stocks to buy.

Good work. Your clients should get their money's worth. Thank you.


On Oct 25 01:02 PM Peter Mycroft Psaras wrote:

> Nice Job, but I would not classify the list as growth plays but rather
> value plays. I say this because, though they have very attractive
> Price to Free Cash Flow (seekingalpha.com/symbo...) numbers,
> their Free Cash Flow Return on Invested Capital (seekingalpha.com/symbo...)
> is about average. I would only classify LMT as a growth play as it
> has a FROIC of 34.54%.
>
> When investing I look for PFCF below 15 times and FROIC above 20%+.
> When you are lucky enough to find a combination of the two you find
> a perfect balance of growth + value and you get capital appreciation
> through capital preservation.
>
> For those who don't know;
>
> PFCF =Market Price/ (Cash flow per share-Capital Spending per share)
>
>
> FROIC = FCF per share/ (long term debt per share + shareholders equity
> per share)
>
> FROIC basically tells you how much return in free cash flow a company
> generate for every dollar of Total Capital they employ.
>
> I consider FROIC the primary determining factor in identifying growth
> companies as you can compare every company (except financial's) on
> an equal basis. The question I ask every company I analyze is = how
> much return (in percent) in FCF are you going to give me for every
> dollar of total capital you invest.
>
> As you will see I have analyzed your list from a FROIC point of view
> below;
>
> HUMANA INC (seekingalpha.com/symbo...)
>
> FCF PS = $5.75
> TCAP PS = $47.35
> FROIC = 12.14%
> PRICE TO FCF = 6.53
>
> CAL DIVE INTL (seekingalpha.com/symbo...)
>
> FCF PS = $0.90
> TCAP PS = $9.56
> FROIC = 9.40%
> PRICE TO FCF = 11.18
>
> UNITEDHEALTH (seekingalpha.com/symbo...)
>
> FCF PS = $3.75
> TCAP PS = $33.54
> FROIC = 11.18%
> PRICE TO FCF = 6.89
>
> WELLPOINT INC. (seekingalpha.com/symbo...)
>
> FCF PS = $6.70
> TCAP PS = $72.98
> FROIC = 10.89
> PRICE TO FCF = 6.87
>
> LOCKHEED MARTIN (seekingalpha.com/symbo...)
>
> FCF PS = $8.00
> TCAP PS = $23.16
> FROIC = 34.54%
> PRICE TO FCF = 9.02
>
> AETNA INC. NEW (seekingalpha.com/symbo...)
>
> FCF PS = $3.35
> TCAP PS = $30.69
> FROIC = 10.91%
> PRICE TO FCF = 7.78
>
> L-3 COMM HLDGS (seekingalpha.com/symbo...)
>
> FCF PS = $8.40
> TCAP PS = $90.00
> FROIC = 9.33%
> PRICE TO FCF = 8.86
>
> RAYTHEON CO (seekingalpha.com/symbo...)
>
> FCF PS = $5.45
> TCAP PS = $33.33
> FROIC = 16.35%
> PRICE TO FCF = 8.52
>
> ASSURANT INC (seekingalpha.com/symbo...)
>
> FCF PS = NA
> TCAP PS = NA
> FROIC = NA
> PRICE TO FCF = NA
>
> STANCORP FINCL (seekingalpha.com/symbo...)
>
> FCF PS = NA
> TCAP PS = NA
> FROIC = NA
> PRICE TO FCF = NA
>
> Endo Pharmaceuticals (seekingalpha.com/symbo...)
>
> FCF PS = $2.25
> TCAP PS = $17.06
> FROIC = 13.18%
> PRICE TO FCF = 10.34
>
> OMNICARE INC (seekingalpha.com/symbo...)
>
> FCF PS = $3.50
> TCAP PS = $50.42
> FROIC = 6.94%
> PRICE TO FCF = 6.50
>
> FROIC gives me a real return on Main Street and if I can get a 20%+
> return on Main Street and at the same time buy a stock that is selling
> for less than 15 times its FCF then there is a very high probability
> that it should be very successful investment.
>
> By choosing 20%+ as my minimum FROIC I have built a portfolio of
> 29 holdings for my clients that has a combined portfolio FROIC of
> 32% and sells as a group for 12.35 PFCF.
>
> As for PFCF I came up with the 15 or less number as being Ideal after
> performing a 58 backtest. To view the backtest just click the link
> below.
>
> mycroftresearch.com/up...
>
>
> Disclosure Long LMT No Position in the others
>
> The Fine Print: As Registered Investment Advisors, we see it as our
> responsibility to advise the following: We do not know your personal
> financial situation, so the information contained in this communiqué
> represents the opinions of Peter "Mycroft" Psaras, and should not
> be construed as personalized investment advice.
> It should not be assumed that investing in any securities we are
> investing in will always be profitable. We take our research seriously,
> we do our best to get it right, and we “eat our own cooking,” but
> we could be wrong, hence our full disclosure as to whether we own
> or are buying the investments we write about.

Oct 28 08:41 AM

[ArtfulDodger:]

Damned good comment, TE.

No doubt, it's a loss of freedom and can potentially break the nation, but I think that's what the Marxist in charge of the nation want.

This is a non-violent (so far at least) revolution being carried out right before our eyes.

If this brood manages to take over both the healthcare and the power industry, they'll control the most powerful industry sectors in the world. And they'll have us by the hanging ones.


On Oct 26 02:10 PM TeresaE wrote:

> Telling people to buy insurers, who currently operate on an average
> 4-5% profit and soon will be hit with across the board "windfall"
> taxes AND forced by gunpoint customers (of which half, or more, will
> be instant users - not pay but don't use), doesn't seem to be prudent
> until we can read and analyze how the destruction in WDC will play
> out.
>
> Then you tell people that pharmaceuticals are not going to go anywhere,
> yet the industry is being gifted a green light from Obama, mandatory
> &amp; government paid vaccine revenue AND 25 million new customers.
> Care to explain the "blip" of their substantial profit &amp; sales
> increases after Congress "helped" seniors a couple years ago? <br/>
>
> Pharms stand to be the ONLY winners (other than the paid-for-life
> employees in FIFTY-THREE new government departments) in the health
> care fiasco.
>
> Especially when you realize that 50% of the adult population is on
> a daily medication.
>
> 12.5 million, new customers paying with taxpayers and insurance companies
> money - not their own earnings - and you don't think that is going
> to impact pharm's future revenues in any material way?
>
> This is why "reform" is going to destroy us. No one realizes reality
> and the costs that will rain down upon us.

Oct 28 08:51 AM

[dave_onju:]

Spot on Uncle PIe
Good to see someone lives in the eal wold


On Oct 25 12:20 PM Uncle Pie wrote:

> Healthcare in America is about 35% more costly per capita than it
> is in other developed countries because the health insurance oligopoly
> marks up the cost of health care by that much. Take a look at the
> income statement of any of these companies. You'll find that about
> 2/3rds of revenue goes to pay for actual health care (ie. claims)
> and the other 1/3rd goes for overhead, executive compensation, dividends
> to shareholders, etc. It's not hard to connect the dots. Trouble
> is, such a costly system makes our labor costs non-competetive, and
> leaves 48 million people without access to healthcare. The whole
> system is on the verge on collapse which is the only reason the politicians
> are paying any belated attention to the issue. I'd think twice before
> investing in health insurance companies like WLP or AET or AIZ or
> HUM and am not surprised by the low p/e ratios as their business
> model is not long for this world. Health care costs per capita in
> Canada are 1/3rd lower than ours and Canadians have a longer life
> expectancy, according to figures in The Economist magazine and elsewhere.
> Number of health insurance companies in Canada: Zero.

Oct 28 08:55 AM

[Tack:]

Thanks for the useful analysis.

However, I was taught long ago that when shares of companies look enticing --as for example when an issue has a higher-than-normal yield-- one has to distinguish between those companies that are merely undervalued and those which have been devalued because of changes to their future prospects.

Unfortunately, many of the healthcare firms listed face grim futures if the government's final approved plan includes any truly operable public option. If such occurs, then, the health insurers will face a rapidly declining insurance pool, as U.S. companies will offload corporate-supplied, privately-insured health plans on the government. The effect of this shift will disrupt the economies of scale for the private health insurance industry, leading to rapid contraction in its business, including the merger and/or failure of various firms.

So, it's not obvious in certain cases, above, that passing certain statistical tests positions these issues for future gain. In fact, identifiable real-world, model-changing threats may see many of them decline further, and significantly.

Oct 28 09:16 AM

[Anthony Alfidi:]

The health reform bill that passed the House today will more likely than not put a cap on health insurers' profitability, knowcking them out of the growth category.

Defense spending is heavily dependent on deficit spending. That won't continue forever. The U.S. defense budget is larger than those of the next 44 nations; can any contractor grow its way into markets that small?

Nov 08 03:23 AM

[mbkelly75:]

Price/Sales Ratio does an outstanding job of determining what stocks are over/under valued. P/S <1 shows that it might be undervalued in a way that passes by any fussing around with Earnings that might effect the PE Ratio or even the much better PEG. It is useful as a check on that point. I also use Moving Averages to point out to me if a stock is trending up or down. If a stock is trending down - it is NOT a buy - no matter how good it's fundamentals look. I will wait until it shows me that it is all done trending down and has started trending up again. When the MAs form a Golden Cross - that is an outstanding sign of an up trend beginning.


On Oct 28 09:16 AM Tack wrote:

> Thanks for the useful analysis.
>
> However, I was taught long ago that when shares of companies look
> enticing --as for example when an issue has a higher-than-normal
> yield-- one has to distinguish between those companies that are merely
> undervalued and those which have been devalued because of changes
> to their future prospects.
>
> Unfortunately, many of the healthcare firms listed face grim futures
> if the government's final approved plan includes any truly operable
> public option. If such occurs, then, the health insurers will face
> a rapidly declining insurance pool, as U.S. companies will offload
> corporate-supplied, privately-insured health plans on the government.
> The effect of this shift will disrupt the economies of scale for
> the private health insurance industry, leading to rapid contraction
> in its business, including the merger and/or failure of various firms.
>
>
> So, it's not obvious in certain cases, above, that passing certain
> statistical tests positions these issues for future gain. In fact,
> identifiable real-world, model-changing threats may see many of them
> decline further, and significantly.

Nov 15 02:25 PM