7 Undervalued Stocks To Research Further

by: Hedgephone

Even though we expect some near term volatility (IE a drop back to $1100) as the S&P hit resistance at the 50 day moving average, we think many shares look attractive at current valuations provided you have some type of hedging strategy in place to protect capital and mitigate risk until the market finds a true bottom. Here are 7 undervalued stocks to consider.

(NYSE:JNJ) -- Johnson & Johnson is the epitome of a stalwart company with a reasonable valuation. These shares should outperform bonds and look to be a safe way to participate in the equity market without taking on too much risk. Staples usually outperform during periods of economic weakness, because people still need to wash their hair and brush their teeth. JNJ sports a PE ratio of 15 with a forward PE at around 12.5X earnings. The stock is a bit expensive at current prices for me to simply buy and hold, so a covered call approach in JNJ looks to be a better play. For those of you looking for a time decay approach with lower risks, look to buy an in the money January $50 call options and sell the at the money October call options for a calendar spread.

(DUCK) -- Duckwall Alco Stores is a discounter which sells everything from groceries to batteries. Duck is owned by Michael Price, the famous super investor of the 1980's and 1990's. The stock is cheap but not profitable. Duck is selling for just 35% of tangible book value and the company reported August same store sales that were up 2% YOY. Duckwall is a cheap name and could offer investors a strong entry at current levels if management can turn the company around and return to profitability going forward. Because shares are already extremely cheap, the risk to the downside in this stock is heavily mitigated in our view.

(NYSE:EGY) -- (Valco Energy) West African oil and gas drilling sound like a good bet to you? Well, it's certainly not without risk but with no risk there is no reward. Vaalco Energy has been one of the fastest growing oil and gas producers of the past decade, regularly making esteemed lists of fast growing companies listed on a stock exchange. EGY is trading for just 7.5X earnings right now as well as an eye popping 1.58X EV/EBITDA ratio. The company also boasts a YOY quarterly revenue growth rate of over 70% along with a net profit margin of 25% and an ROE of 25.48%. To be sure, these are quite impressive numbers and the stock looks like a true bargain to us with a 5.5X forward PE ratio and significantly undervalued reserves, now may be the time to dip your toes into this somewhat speculative but remarkably cheap GARP stock.

(NYSE:HES) -- (Hess) Speaking of oil stocks with some African exposure, Hess looks inexpensive to us as well with a 7.5X PE ratio and a low price to book multiple of under 1X book. Hess is a true value investment in our view as long as oil prices remain reasonably robust and the economy doesn't slip into another Depression. Oil prices will likely be buoyed by supply and demand fundamentals as the World runs out of light sweet crude reserves in the future.

(NYSE:VALE) -- (Vale) Mining shares have all struggled lately except for gold mining shares which have managed to outperform equities but underperformed the metals futures. Base metal miners like VALE are facing headwinds from a slowing Chinese infrastructure build and the realization that building things just to employ people may not actually be synonymous with everyone's favorite catch phrase these days, "economic growth." A term that is thrown around a lot but has been seen only on seldom occasions since the "recovery" began in 2009. VALE is a name that investors should buy if Bernanke announces more QE because VALE makes money in periods of high commodities price inflation. VALE is trading for a ridiculous trailing PE ratio of 5.8X earnings and 4.8X EV/EBIDTA.

(NYSE:AIG) -- American International Group has been creamed in the summer swoon this year, but the stock is still a bargain at less than half of book value because the balance sheet was supposedly scrubbed clean and the company has exited many of the problem areas of their business. At least that's the thesis behind Fairholme Capital's large position in the name and even though in the short term this investment may be down, over the long run it would be foolish to count Bruce Berkowitz and company out as far as investment acumen is concerned. Look for AIG shares to come out of the current malaise better than many of the other more leveraged financial names with large European debt or derivatives exposure. At least that's the hope anyways...

(NYSE:KEP) -- Korea Electric Power has delivered disappointing returns on capital lately but we think the 70% discount to book value is unwarranted in these shares and we feel that over the long term KEP may be a good place to park some capital. Selling covered calls always makes sense in cheap names that lack a near term catalyst because this methodology lowers volatility and a bit of risk in a well diversified portfolio of undervalued equity investments.

Disclosure: I am long DUCK, JNJ, HES, AIG.