As I meandered around the internet looking at different stock screeners, I came across a site that touted Super Value investment stocks (Market In Out Stock Screener).
What a coincidence. I love value stocks, and super value stock should be the Green Lanterns of the market. What caught my eye was the first stock on the list. It was one I had owned way back when, and it was an underachiever.
The 3 "super value" stocks are as follows:
Shocked at AOB turning up as a super value investing stock, I examined their trading criteria. This is their super scanning features:
- Low price to book ratio
- Prices at least 25% below 5 year highs
- Relatively low price to sales ratios
- Return on equity greater than 7.5
- Price to cash flow less than 15
- A debt to equity ratio slightly less than the industry average
- Market cap breater than 100 millon
- Current ratio greater than 1
This may seem like a fantastic scan, but let us dig into these stocks a bit deeper and see if they are Batmans or Jokers.
The 'Super Value' Investing Stock Picks
AOB – Over the past 3 years, the earnings have fallen by more than half. The PE ratio is hovering around 7… for the moment. This might seem like a value play, but there are some other considerations to be made. For one, every time I look at their earnings there appears to be a large negative surprise. As well, earnings estimates are lowered on a regular basis. Growth for FY 2011 is only 17.9%, which isn’t much when you look at losing 52.7% in FY 2010. If you have 100 bucks and lose $53, and then get back 18% of your $47, you still only have $55.46.
Further downsides are slumping EPS growth, gross profit margin, return on equity and overall dropping FCF over the past couple of years (some spikes up though). The liabilities have gone way up, as has long term debt, and expenses are up as well.
The small upside is that shareholder equity has increased, as have revenues, total assets, and book value. Value investing usually implies good value that will increase over time. Unless the increasing amount of money they are spending on R&D starts translating into bigger profits (and not just revenues), this is not a long term holding for a low risk portfolio.
Is this stock undervalued at the moment? Quite likely. But unless the company is liquidated and the cash dispersed among shareholders, the 'price is the price' and is not likely to change - unless AOB can show positive and sustainable signs of growth. And yes, they do have quite lot of cash on hand, but recall the share dilution announcements from which they earned large portions of it. Instead of a super value play, I’d call this a high risk reversal possibility, if and when AOB adjusts the rudder.
DK – Delek US Holdings Inc. is a small cap dividend payer. With a trailing annual yield of 1.3%, this isn’t a big income earner. The first clue that something may be wrong is the high short ratio of just under 10%. As well, it appears institutions have dumped the majority of their positions. When looking at the big picture for earnings growth, the past 5 years have seen an average decline of 24.36 percent and the next 5 years are anticipated as 15% per annum.
On a more positive note, they do hope to return to being profitable for the 2011 year, and turnaround stocks with positive EPS can grab the attention of buyers. Still, if they cannot generate positive earnings real soon, the dividend payout will start to cut deep. While this stock seems to be fairly valued at the moment considering its financial health, it would be hard to call this a "super value" pick unless overall earnings were growing when compared to the past three years or reporting data. Again, a possible turnaround pick but not what I call a super value selection. And not a sustainable income generator with dividends, at least not at the moment.
MIR – The site claiming that MIR is a super value pick names Mirant Corporation. I’m a bit flummoxed - do they mean that Atlanta-based energy company? The one that merged with RRI and then re-named GEN? If that is the case, the "super value" charts do not match up with the current share price - not even close. Because I have no idea if they are talking about a stock in some other market in Germany, or a changed ticker symbol that is very different in every way to the information they list, I have to sit this one out.
The point? Screening can be a good start. But always do your due diligence. It may only give you a snapshot of what is happening. You are likely not in the market for some arbitrage play where you hope the market quickly drives the price up since you feel the share price is under-priced a few pennies. Likely you want a stock that has deep value and should increase over time.
A better screen would be to look for 5 years of revenue and EPS growth historically and in the future forecast. Add in low price to book under one and long term debt to equity under one. It's just a starting point but these value stocks may have a better chance at sustained growth. Here is a quick list of those stocks:
Granted, this is also just a starting point. Next you need to look at how the fundamentals change over time. Start with a screen for ideas, but then get to work to find the solid and long term value investing stock picks.
NOTE: To be fair, I have not paid for membership with Market In Out and it appears to have many useful features. But simply hitting the "Value Investing" or "Income Investing" button and buying the listed stocks is not wise. You must dig deeper and I am sure the site recommends this. My point is not to attack Market In Out, which looks like a good screening site, but not to run ahead an buy pre-screened stocks without due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.