When a stock trades for under $20, it really says nothing about the company or the underlying earnings. However, it does make the stock look affordable, especially to smaller investors with limited capital.
To more properly screen these companies, I looked for gross margins in excess of 50% and a maximum price-to-earnings ratio of 20. The following five companies meet these criteria. Still just meeting the criteria is not enough to warrant an investment. In this article I’ll analyze these companies from a value investor's perspective to see which stocks are good buys right now.
Avon Products, Inc (AVP)
Two consecutive earnings misses for beauty product maker Avon has done serious damage to the company's share price. While that’s bad news for those owning the stock, value investors need to investigate. Sharp drops like this one, falling from $30.62 in May 2011 all the way down to around $16, could lead to great buys if the fundamentals are still strong. According to the most recent quarterly report, the earnings misses are mainly due to rising labor costs. This has squeezed the company’s margins down to 6.6%.
Competitors are doing better, Estee Lauder Cos. Inc. (EL) and Kimberly-Clark Corp. (KMB) both have a 8.60% net profit margin. Where Avon excels is with its valuation, at 8.9 times forward earnings and dividend yield at 5.72%. These are the kind of numbers value investors are looking for. Interested investors need to vet the growth prospects and determine if the recent earnings misses are signs of bad things to come or not. That said, this looks like a great opportunity.
Marvell Technology Group Ltd. (MRVL)
Optimism for integrated circuit maker Marvell has faded since the company’s shares peaked in April of 2010 at $22.87. Now trading in the $13 range, shares trade for 12.1 times forward earnings. The company has maintained a net profit margin of 21.3% when others in the industry have been struggling. Competitor MEMC Electronic Materials Inc. (WFR) has a negative 1.4% net profit margin. Broadcom Corp. (BRCM) trades for 19.1 times forward earnings and has a 12.5% net profit margin.
Looking at the competitors, Marvell looks attractive. The level of attraction is based on the investor’s opinion of the integrated circuit market for wireless and mobile devices. Investor’s need to be confident in this industry to invest, but the stock’s recent decline has opened the door for an opportunity. For that opportunity to be worthwhile this company will need to expand growth in the future.
Yamana Gold, Inc. (AUY)
Remaining believers of a looming apocalypse continue to inflate anything gold-related. Apparently in the event of the apocalypse the most important thing will be a heavy, soft metal like gold. Right? All kidding aside, gold is a great hedge for inflation and inflation looks to be a sure bet in the United States. Sure bets lead to high valuations. Gold miner Yamaha Gold is no exception. Trading for 14.1 times forward earnings, investors are counting on strong future growth.
The company only offers 1.23% dividend yield, so investors must be comfortable with the continued expansion of gold prices. Personally, the idea of gold having any real value is lost on me. Since it’s real value and use is limited, its valuation is based on psychological beliefs, which can quickly dissipate. Gold’s performance can’t be denied but it has the makings of a bubble. Investors should beware of gold and gold miners like this one. The same goes for Barrick Gold Corporation (ABX), Goldcorp Inc. (GG), and Kinross Gold Corporation (KGC).
Crocs, Inc. (CROX)
Lowered guidance in October really hammered shares for footwear maker Crocs. Overnight, shares fell from $26.64 to $16.08. Now trading in the $14 range for 11.9 times forward earnings, the falling price may have created an opportunity. Crocs' record has been impressive, growing earnings 24.7% annually over the last five years. Crocs has also maintained an 11.5% net profit margin in a very competitive industry that averages 3.0%.
Niche footwear makers like Decker Outdoor Corp. (DECK), Steven Madden Ltd. (SHOO) and Wolverine World Wide Inc. (WWW) trade for much higher multiples, 19.5, 14.1 and 13.2 times forward earnings respectively. While Crocs are more “fad-like” than other shoes, the company has maintained growth much longer than a traditional fad. If Crocs stay popular and the earnings keep growing, the current share price could represent a great opportunity. The best way to test that “if” is to buy some Crocs, see if you like them and decide if you’d buy them again.
Knight Capital Group, Inc. (KCG)
Despite strong third quarter earnings, shares for market maker Knight Capital Group have endured a recent decline. Shortly before reporting earnings in October, shares peaked at $14. Currently, shares trade in the $11 dollar range for 9 times forward earnings. The company offers no dividend and earnings have been growing at 9.5% annually over the last five years. Larger market makers like Goldman Sachs (GS) and Morgan Stanley (MS) have many other businesses aside from market making and earn larger profit margins. However, the market making business is a strong one, essentially investment houses are finding and exploiting arbitrage opportunities.
We all know arbitrage is a great business model if you can do it. Knight Capital differs from the larger market makers because the company makes markets as its primary business. The company limits risk by maintaining high levels of liquidity. The main risk for this company is volatile markets that run against their market making strategy. This company has a great business model; however, the future growth prospects are hard to predict, as the company’s advantages over the next market maker are not easily identified. Without a dividend and given the uncertain growth prospects I can’t recommend this stock. Value investors should take a closer look if the business model appeals to them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.