By Douglas Ehrman
Every investor is forever in search of the proverbial “bargain” stock, and is often willing to turn to sources that range from the outlandish to the absurd. While there are rarely bargains available -- which implies a value that is disproportionately appealing relative to the risk -- there are stocks that are underpriced relative to their peers and that provide aggressive value-to-risk profiles. What follows is a discussion of six such bargain stocks that look appealing relative to their peers, as well as some insight into why these stocks may be good places to invest.
Sprint Nextel Corp. (S) has been receiving more than its share of press coverage lately as speculations swirl around whether it will get the iPhone 5 in the coming months. The initial reaction to the news was a quick pop in the stock, but as Apple (AAPL) has remained quiet on the subject, investors have backed off a bit. One of the reasons that S has been overlooked is that it does not look great in terms of its financial metrics; Verizon Communications Inc. (VZ), AT&T, Inc. (T) and Vodafone Group (VOD) each have better numbers. The price-to-earnings ratios are as follows: 10.7 for VOD, 8 for T, and 15.8 for VZ. S does not have a price-to-earnings ratio because it lost money, and therefore has a negative number for the earnings portion of the ratio. What should be taken away from this situation is that S is a bargain based on its position in the market. The potential catalyst of the iPhone would allow the company to add to its already loyal customer base, and could make it a sleeper worth owning.
France Telecom (FTE) – Under the current economic landscape, the dividend yield available on FTE, 8.5%, is extremely attractive from a company that is solid and reliable. With prevailing interest rates on Treasuries around 2%, the chance to receive more than four times this rate is appealing. In the realm of foreign telecom, FTE is a more attractive choice than VOD. FTE is trading at a trailing price-to-earnings of 10.2, versus VOD, which is trading at 10.7. While this difference is not significant, with an operating margin of 17.7% for FTE versus 14.6% for VOD, the appeal of FTE climbs. Some of FTE’s other competitors are discussed above, but its real appeal is the income element.
Hewlett-Packard Company (HPQ) is a true valuation play in terms of both price-to-earnings and price-to-earnings over growth (PEG). The primary competitors for HPQ are Accenture (ACN), Dell (DELL) and International Business Machines, Inc. (IBM). The price-to earnings for each of the four are 5.3 for HPQ, 15.8 for ACN, 7.5 for DELL and 13.1 for IBM. Price-to-earnings is a measurement of the price of the each dollar of earnings that an investors pays based on the prevailing price in the market. Lower is considered better, because it means that the stock is cheaper on a relative basis. When growth is introduced, the logic is to make a determination of how expensive the stock is with a view toward the future. A reading below 1 is considered attractive. The reading for HPQ is 0.62, relative to 1.49 for ACN, 1.11 for DELL and 1.05 for IBM. This data suggests that not only is HPQ the most attractive of the group, it is the only one of the group with an attractive reading. This suggests that HPQ rightly belongs on the bargain list. The catalyst that investors should watch includes HPQ’s participation in both the smartphone and tablet markets.
NTT DOCOMO, Inc. (DCM) – DCM is one of the largest wireless communications companies in Japan. With a trailing price-to-earnings ratio of 11.7, the stock is fairly priced to cheap relative to its peers. The company has an operating margin of 20.9%, placing it near the top of the group. The numbers on its global rivals, like S, VZ, T, VOD and FTE, are mentioned above. This stock makes the list as another strong value play. The stock has a dividend yield of 3.1%. While this is not as strong as FTE, the Japanese market is very stable. The yen is not under the same pressure as the euro, so the dividend may be safer in U.S. dollar terms.
Wells Fargo & Company (WFC) – There are a lot of apparent bargains in the realm of mega-banks right now. The financial metrics, however, do not tell the full story. Those will be provided shortly, but the real question is the balance sheet for each company. The most direct competitors are Bank of America Corp. (BAC), Citigroup, Inc. (C), and JPMorgan Chase & Co. (JPM). The trailing price-to-earnings ratio for each are: 9.1 for WFC, BAC lost money, 8.3 for C and 6.9 for JPM. The operating margins for each are: 34.6% for WFC, 1.9% for BAC, 20.4% for C and 39.9% for JPM. Of the four companies, WFC and JPM stand above the rest, so in determining which the bargain is, it is time to think about the balance sheets. With multiple rounds of lawsuits floating about from mortgage scandals and the like, both of these companies seem to be well insulated. If there is a litigation concern, WFC has its exposure “out there” already. Both companies are attractive, but the retail business of WFC seems a bit more attractive in the current environment.
Banco Santander S.A. (BSBR) – Brazilian banks in general have been an area of interest for investors for some time, given the growth going on in that country. The primary competitors to BSBR are Banco Bradesco (BBD) and ITA (ITUB). All three have different strengths, but both BBD and ITUB are often more carefully followed. Financial data on the group is available, but has proven less than perfectly reliable. This stock represents a bargain because if the group as a whole is lifted, BSBR may be a late mover, but will benefit from the success of the group.