I feel that in order to see substantial gains in the market, one must do substantial research in order to find stocks that are being sold at a true "value." A momentarily bad quarter and shifting market sentiment has pushed the market low, on some stocks more than on others.
When looking for stocks that are “undervalued” there are several facts one can dissect, and even speculation can be used. Many methods are used to find stocks that are considered undervalued, one popular method is PEG (Price/Earnings to Growth). I like to use this ratio because unlike the P/E, it takes into account growth. Below I have screened four stocks that I believe to be undervalued given their < 1 PEG. Not only are they undervalued, but these stocks are relatively safer than the market given their <1 Beta. Not only did I stop there, I made sure that each of these stocks have a return on assets and equity >20%.
Microsoft (MSFT) is engaged in developing, licensing and supporting a range of software products and services. It also designs and sells hardware, and delivers online advertising to the customers. The current market price is $28.25 with a one-year analyst price target of $31.07. This represents a 10% upside potential not including its 2.8% dividend yield. MSFT has a PEG of exactly one and a beta of 0.98 which shows its steady growth potential at a relatively safe rate.
Based on forward PEG, MSFT currently trades at a 10% discount to its Software Industry peers and its current trailing P/E of 10.3 represents a 76% discount to its Software Industry average. Given this discounted price, MSFT fairs very well compared to its peers. Microsoft has an operating margin of 38.78% compared to; Apple (AAPL) at 31.22%, Google (GOOG) at 32.76% and Oracle (ORCL) at 36.96%. Microsoft has a market cap of 237.69B and a net income of 23.48B, this represents a net income of 9.88% of market cap. This number is better than AAPL with a market cap of 394.72B and net income of 25.92B making up 6.57%. Despite some market share loss to Apple and the Linux operating system in recent years, Microsoft Windows operating systems still run more than 90% of all PCs currently in use.
From fiscal year 2002 through 2011, total revenue increased at a compound annual growth rate (OTCPK:CAGR) of 11%. This company really is a sleeping giant. Other excellent news for MSFT is the news it announced this month that the Nokia Lumia 900 and HTC Titan II will both be launched through AT&T in the coming months on 4G. I believe due to this Microsoft will see significant traction in the mobile space given the Windows 8 Metro style look, Nokia partnership, and increasing support from manufacturers. MSFT notes 500M users on Windows 7 (best selling ever). Also, Xbox remains very successful and Kinect, which has helped transform the Xbox, will be coming to Windows on February 1.
Those that say MSFT is dead money, I feel are not seeing what is happening. Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend. Also, the 10, 21, 50, and 200 day moving averages of $27.43, $26.65, $26.16, and $25.92 respectively represent a bullish trend. ROA is 20% and ROE is 44% with an EPS of 2.75. For fiscal year 2012, analysts estimate that MSFT will earn $2.74. For fiscal year 2013, analysts estimate that MSFT's earnings per share will grow by 11% to $3.03.
Gilead Sciences (GILD) is a biopharmaceutical company. The Company focuses on the development and commercialization of human therapeutics for life threatening diseases. The Company has operations in North America, Europe and Asia Pacific. The current market price is $46.40 with a one-year analyst price target of $49.63. This represents a 7% upside potential. This stock sports a PEG of 0.71 and a beta of 0.46. This represents a much undervalued company with extremely low volatility compared to the market.
Compared to the Biotech & Med Research Industry, GILD is currently trading at a significant discount based on trailing P/E, forward P/E, and forward PEG. GILD has an operating margin of 47.98% compared to its direct competition: Bristol-Myers Squibb Company (BMY) at 33.04% and GlaxoSmithKline plc (GSX) at 37.26%. GILD also sports an EPS of 3.42 compared to BMY with only 1.94 and GSX with 0.99 EPS. For fiscal year 2012, analysts estimate that GILD's earnings per share will grow by 22% to $4.20.
This company has a lot of skepticism built in, which is why the price is so low. The company withstood pressure in 2009, and in 2010 took a big hit in share prices due to the fear of new legislation and worries about patent expiration. Despite skepticism, earnings continue to rise, due in part to a very lucrative HIV drug.
Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend. Also, the 10, 21, 50, and 200 day moving averages of $43.16, $40.81, $40.08, and $40.44 respectively represent a bullish trend. This stock is up nearly 12% since my last recommendation, and I feel is still growing.
Telecom Argentina SA (TEO) is an Argentina-based company primarily engaged in the provision of national fixed-line telecommunication services, international long-distance service, data transmission and Internet services and mobile telephony. The Company also offers such solutions as online business and Web hosting, virtual private network (VPN), mobile operating systems developed by Microsoft and Blackberry, toll-free telephone numbers, call centers and voice over Internet protocol (VoIP) line, as well as other services mainly aimed at corporate clients. The current market price is $20.54 with a one-year analyst price target of $24.21. This represents a 17.87% upside potential.
TEO has an operating margin of 22.32%compared to its direct competition: America Movil S.A.B. de C.V. (AMX) at 22.68% and Transportadora de Gas Del Sur S.A. (TGS) at 21.60%. TEO also enjoys an ROA of 20% and an ROE of 35.92%.
Analysts believe TEO has a defined strategy to achieve telecom leadership in Argentina by enhancing the quality of telecom networks, offering new services at competitive prices by taking advantage of leading technologies, increasing teledensity, and improving service quality and productivity. This is important because Argentina is a key driver for future growth. TEO has a 35% market share for broadband customers. Although cable modems have been the preferred medium for broadband delivery in the past, ADSL has been gaining rapid acceptance. The data and Internet businesses had increases in revenues of 27% and 28%, respectively, in the first nine months of 2011. This mixed with TEO’s fundamentals leaves significant room for growth potential.
Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend. Also, the 10, 21, and 50 day moving averages of $19.51, $18.79, and $18.79 respectively represent a bullish trend. I believe this undervalued stock is on its way back up this year.
Cirrus Logic, Inc. (CRUS) develops high-precision, analog and mixed-signal integrated circuits for a range of audio and energy markets. Building on its diverse analog mixed-signal portfolio, Cirrus Logic delivers products for consumer and commercial audio, automotive entertainment, and targeted industrial and energy-related applications. The current market price is $20.39 with a one-year analyst price target of $26.5. This represents an upside potential of 30%. CRUS appears to be extremely undervalued and relatively safe given its PEG of 0.77 and beta of 0.5.
CRUS's current quarter consensus estimate has increased over the past 90 days from 0.37 to 0.43, a gain of 14.7%. This improvement is significantly greater than its Industry average. The company's gross margin has been higher than its Industry average for each of the past five years, currently is 52.65%. The company's Trailing P/E, Forward P/E, and Forward PEG multiples are all currently at or near their 5-year lows. Based on forward PEG, CRUS currently trades at a 66% discount to its Semiconductors Industry peers and based on trailing P/E, CRUS currently trades at a 63% discount. Also compared to its direct competitors CRUS has an EPS of 2.49; while its direct competition STMicroelectronics NV (STM) has 0.98 and Texas Instruments Inc. (TXN) EPS is 2.40.
Moving Average Convergence/Divergence (MACD) indicates a Bullish Trend and its Up/Down volume pattern indicates that the stock is under Accumulation. Also, the 10, 21, and 50 day moving averages of $17.65, $16.60, and $16.46 respectively represent a bullish trend. I agree with analyst Tore Svanberg that this stock is poised for a major rebound and a great buy opportunity in the current environment.