The sharp downturn in the market has hit stocks pretty uniformly, creating the potential for some real bargains. In a market that is almost completely GARP (growth at a reasonable price), some stocks have been left at prices that are hard to believe. With this in mind, I ran a screen for companies that have been growing strongly but are valued at what seem to be unsustainably low prices. Here are the parameters I used:
- Market Cap > $100mm
- LT Debt to Cap < 10%
- Net Debt to Cap < 0%
- NI Margin > 0
- 5-year Compound EPS Growth > 15%
- Most Recent 4 Quarters EPS Growth > 0%
- Expected 2011 EPS vs. 2010 EPS Growth > 0
- Expected 2012 EPS Growth vs.2011 EPS Growth > 0
- Trailing PE < 12X
- Price to Tangible Book < 1.5X
The goal was to use the screen to find stocks with strong balance sheets, low valuations, strong historical growth and positive expected growth in the near future. Here are the 6 stocks that made the cut:
Not surprisingly, the majority come from the beleaguered Tech sector. Unfortunately, I know a few of these a bit too well, at least lately, as three of them have been in my Top 20 Model Portfolio.
While each of these stocks has grown earnings strongly since 2006, the market surely seems to discount their future prospects. All of the stocks trade at extremely low multiples in terms of PE or Enterprise Value to EBITDA, and two of the stocks trade below tangible book value. Are these extreme values potentially traps? I can best address the three I know, but I will attempt to share my thoughts on the other three as well.
Preformed Line Products (PLPC), which has very large inside ownership, has done some smart acquisitions in the past couple of years and is capitalizing on energy and communications buildouts all over the world. The company sells enclosures and products to secure wiring. This one strikes me as silly cheap, retreating from an all-time high just a few months ago.
TechData (TECD) is one that I have followed for over a decade. The company distributes IT products (as well as consumer electronics increasingly) in the Americas and Europe. It's a blocking and tackling business, and they do it well. IT distributors trade very cheap to other types of distributors. TECD strikes me as silly cheap too.
Multi-Fineline Electronics (MFLX) also appears to be very cheap, but this one concerns me due to its high exposure to Research in Motion (RIMM) and Apple (AAPL). It used to be exposed to just Motorola (MMI), but managed to transition away. I bought the stock in the model as a smart phone play, but the company has struggled to find other applications and to penetrate other phone suppliers. Of the three in my model, this is the one that strikes me as potentially a trap.
Audiovox (VOXX) looks to be perennially cheap. The electronics manufacturer, with 13 brands, just executed a large acquisition after years of smaller ones. The owners roster is a who's who of value investors, with substantial inside ownership too.
STEC (STEC) makes flash-based solid drives and is a controversial stock. It's not one that I know well at all. Insiders own about 15% of the company.
Tessco (TESS) has about 33% inside ownership - catching a theme here? The company is involved in maintaining wireless systems for primarily commercial customers (mainly mobile devices and network infrastructure). AT&T Mobility is the largest customer at 26%. Almost all of their revenues are domestic. This one looks somewhat interesting to me. They mention TECD as a competitor, and I know that this is an area in which TECD has increased its focus (through a JV).
I am sure that some of these may prove to be duds, but it appears that these smaller companies aren't being given credit for strong historical growth. If they can keep it up, which I believe PLPC and TECD can (and perhaps some of the others), their very low valuations should improve.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long MFLX, PLPC and TECD in models at InvestByModel.com