Sometimes the best way to find hidden stock gems is through stock screens. Even the most basic parameters can yield money making results. Don't believe me? Try it. Run a stock screen for companies with forward P/Es below 10 and return on assets above 10. You might see a familiar name among the results: Lubrizol Corp, which recently agreed to a definitive buyout agreement with Berkshire Hathaway (BRK.A).
This screen is simple. We're looking for high return on asset companies with low forward P/Es and recent under performance. Here are our settings:
- Return on Assets >= 10%
- Forward P/E <= 10.0
- Current Price Less than 52Wk High >= 20%
- No reverse merger Chinese companies
Philippine Long Distance (PHI)
The Philippine telecommunications giant traded as high as around $75 per share during January 2008. The stock has had a difficult 2011. It started the year at more than $58 per share and currently trades around $46. Forward P/E is 9.27 and price/book is 4.09. According to the latest 6-K filing, fixed line annual revenues and margins have declined year over year, but were compensated for by growth in revenues and margins among the wireless segment. As of December 31, 2010, around two thirds of the company's revenues came from wireless operations.
Seagate Technology (STX)
The disk drive maker has a forward P/E is 7.67, a price/book of 2.31 and a return on assets of 10.93%. It is a cheap stock in a cheap industry. Market watchers have heavily discounted disk drive markers as the popularity of tablet computers and smartphones is expected to adversely affect demand for disk drives. During the last twelve months, Seagate has been approached by private equity firms TPG, KKR and Silver Lake Parters, but they could not agree on a suitable price.
Cephalon, Inc (CEPH)
This biopharmaceutical has a forward P/E is 10.14, a price/book of 1.65 and a return on assets of 11.26%.
Lender Processing (LPS)
The technology and service provider for the mortgage lending industry has a forward P/E is 7.84, a price/book of 5.45 and a return on assets of 15.77%. The company generates high cash flows. During 2010 and 2009, they produced free cash flow of around $400 million. The company's management has also exhibited a willingness to return value to shareholders through dividends, debt and share buybacks. Investors should spend additional time researching this company.
ITT Educational (ESI)
The for-profit education provider has a forward P/E is 8.91, a price/book of 16.76 and a return on assets of 59.38%. The entire industry has been battered by political pressure to enact legislation that would likely decrease enrollment and reduce federal loan funding. While the stocks have risen since last year along with the market and successful push back from industry lobbyists, the uncertainty of legislation will likely dominate the share price in the near term.
Longer term, the industry could continue to face pressures.
Career Education (CECO)
The for-profit education provider has a forward P/E is 8.95, a price/book of 1.90 and a return on assets of 14.99%.
Radioshack Corporation (RSH)
A long time value investor favorite, this stock has consistently beaten the odds. It faces competition from online retailers like Amazon.com (AMZN) as well as brick and mortar operations like Best Buy (BBY), which has rolled out a smaller format called Best Buy Express. With a forward P/E of 7.65 and return on assets of 10.30%, RadioShack could continue to defy the consensus opinion as it benefits from the current shift in retail towards smaller spaces and higher sales per square foot. As we discussed in our previous article, Investors Should Not Ignore This New Trend in Retail, retailers are either decreasing store space or opening smaller outlets. This could create buyout interest as other companies in the retail industry realize the value in Radioshack's base business as well as their entrenched store footprint.
Par Pharmaceutical Companies (PRX)
The drug company has a forward P/E is 9.93, price/book is 1.63 and return on assets is 11.20%.
A Solar Holdings (JASO)
The solar panel maker has a forward P/E is 4.94, a price/book of 1.06 and a return on assets of 13.03%.
Bridgepoint Education (BPI)
The for-profit education provider has a forward P/E is 7.31, a price/book of 3.91 and a return on assets of 35.30%. Like ITT Educational and Career Education, Bridgepoint faces industry-wide regulatory pressures that could dramatically reshape the company's business model. Bridgepoint was actually singled out during a presentation by Iowa's Senator Harkin (pdf) during a committee meeting about for-profit colleges. Among damaging statistics, 60-80% of students withdrew within 2 years as of September 30, 2010. According to the Harkin presentation, in 2009, $700 was spent per student on instruction and $2700 was spent per student on recruiting.
Skechers USA (SKX)
The shoe designer and manufacturer has a forward P/E of 9.40, a price/book of 1.00 and a return on assets of 10.69%. The company's successful line of Shape-Up shoes drove sales and earnings during 2010, but the market is already pricing in a sales decline. The low stock price combined with the company's history of solid performance could provide investors with some margin of safety. Even if sales fall substantially and revert to 2009 and 2008 levels, that would put the stock at a price/earnings of 15 to 16. Though with the overall cheapness in retail names there are better places to invest, investors should pay close attention to this name should the stock drop further.
The designer and manufacturer of power supply and management products has a forward P/E is 6.28, a price/book of 3.11 and a return on assets of 32.44%. In addition, it sports a trailing EV/EBITDA of 2.19. It gets better, it's a medium sized player in an industry that's estimated to grow at a compound annual growth rate of over 20% through 2014. While the company looks strong now, it is the product of a reorganization. Investors also need to consider the risks associated with feed-in tariff and subsidy reductions.
Stock screens are a great way to start the investment process. Lender Processing and RadioShack appear to be strong candidates for additional research, especially if there is additional weakness in their stock price. Both companies are numerically cheap. Lender Processing offers secular opportunities in the mortgage lending business as well as cyclical opportunities when the housing market strengthens. RadioShack faces pressures from Best Buy and Amazon but they will benefit from the retail shift to smaller store footprints.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.