- In this screen we highlight Vishay Intertechnology and Big Five Sporting Goods.
- These are two companies with price-to-earnings multiples and price to “net” working capital ratios near the bottom of the Value Line universe.
- This screen is available every week in the Index section of The Value Line Investment Survey. Subscribers can access the most recent Index here to see all 35 names on the list.
By: Frederick L. Harris, III
The investing world is often broken down into two broad camps: growth and value. The growth group looks for companies with earnings that are advancing at a material clip. The value camp, meanwhile, looks for stocks that are trading on the cheap. The desire to find undervalued stocks is both emotionally and intellectually appealing-after all, who doesn't like to take advantage of a sale? Moreover, value investing follows one of the oldest, and most obvious, sayings on Wall Street, "buy low, sell high."
The problem is that everyone is trying to buy low and sell high, even the growth investors. So it's important to properly define "cheap" and have a systematic way of identifying candidates that meet that criterion. Equally paramount is remembering that some merchandise winds up on the sale heap because it is damaged in some way. A fact that is as true for stocks as it is for consumer goods.
To help investors cull through the list of potential investments, Value Line provides weekly screens. One of the more useful screens for value investors is the Bargain Basement Stocks screen. The screen is fairly simple, highlighting companies with price-to-earnings multiples and price to "net" working capital ratios near the bottom of the Value Line universe. The idea is to identify companies that are trading cheaply relative to earnings and to the money that would be "left over" if the company were to be liquidated. Note that most stocks never trade below their liquidation value, but even trading at two or three times that value is noteworthy.
This screen is available every week in the Index section of The Value Line Investment Survey. Subscribers can access the most recent Index here to see all 35 names on the list. Two companies of interest that we have highlighted are Vishay Intertechnology (NYSE:VSH) and Big Five Sporting Goods (NASDAQ:BGFV).
Vishay Intertechnology is a major manufacturer of passive electronic components, such as resistors, capacitors, and inductors, with facilities in the U.S. and Europe. The company also produces semiconductors and stress sensors. The bulk of Vishay's revenues (approximately 75% at present) are derived from overseas operations, as heightened global demand has been a key fundamental driver over the past few years. Its primary customers include distributors (54%), original equipment manufacturers (39%), and electronic manufacturing services companies (7%).
The company managed to generate respectable operating results through the first six months of 2014. Specifically, it reported sales that were 8% higher than the same period the year before. A healthier macroeconomic environment was a key factor and points to continued top-line strength over the remaining two quarters. Moreover, demand trends in automotive and industrial end markets were encouraging. But earnings per share of $0.40 in the interim was just a penny above the 2013 tally, if restructuring and severance expenses are taken into account. Nevertheless, our 2014 bottom-line target presently stands well above the $0.81 posted by the Pennsylvania-based company last year. Assuming further expansion of operating margins, share net might well be up meaningfully in 2015.
We are fairly upbeat about the company's earnings performance out to the end of this decade. A pickup in the automotive and industrial industries, Vishay's two largest markets, should provide a solid platform for sustained growth. What's more, the company has been active on the acquisition front (thanks to adequate finances), looking to widen its scope and strengthen individual operating segments. To that end, it recently announced the purchase of Holy Stone Polytech Co., a manufacturer of tantalum capacitors based in Japan, for roughly $21 million in cash. That move further solidifies Vishay's competitive position in Asia, which appears to offer tremendous growth opportunities. Finally, an improving macroeconomic picture further down the road augurs well for long-term prospects. Rising earnings may well attract value-oriented investors (low P/E seekers) to this equity for quite some time.
Big Five Sporting Goods
Big Five Sporting Goods is a leading sporting goods retailer in the western portion of the United States, operating 429 stores in 12 states (as of 12/29/13). The company offers athletic shoes, apparel and accessories, as well as a broad selection of outdoor and athletic equipment for team sports, fitness, camping, hunting, fishing, tennis, golf, snowboarding, and in-line skating. It also sells private-label items, including binoculars and camping equipment.
From a profit standpoint, the company appears to be headed for a disappointing 2014. Unfortunately, the first two quarters brought about some problems that were beyond Big 5's control and were exacerbated by cautious consumers. For one thing, the winter weather, which usually aids the sporting season, was so harsh that it kept customers away from the stores and, for the most part, in their homes. To further complicate matters, there was a considerable decrease in demand for ammunition and firearms, since no real legislation arose that would tighten regulations. The second half of 2014 ought to bring about more-favorable year-over-year comparisons, but the damage is done. As a result, we believe earnings will come in well below the 2013 figure. But the bottom line stands to make a comeback in 2015, assuming that the winter is not as unbearable as this year's.
One development that concerns us is the increasingly tough competitive landscape. In particular, Dick's Sporting Goods is making a push toward the West Coast. That company's presence is already being felt in Arizona, and openings in areas where big-box sales have historically gone to Sports Authority are on tap. Still, the majority of Big 5's locations are about 5,000 square feet, and those of its chief rivals are much larger. It seems probable they will compete over that portion of the market, while Big 5 carves a niche in small-box sporting goods.
At the stock's recent quotation, long-term capital appreciation potential looks compelling, when stacked against the Value Line median. But prospective investors should note the shares are on the risky side, given the cyclical nature of the company's underlying businesses. Indeed, during the last recession, the shares tumbled to an historic low of $3.00.