"Those companies that the market expects will have the best futures, as measured by the price/earnings ratios they are accorded, have consistently done worst subsequently" - David Dreman (Dreman Value Management, author, Forbes Columnist, born 1936)
Today, we see a growing number of companies whose stock prices are selling at either rich multiples-to-earnings or companies who have no earnings at all.
One of the rules that my investment mentors shared with me early in my career was: Always invest like you're going to co-own and co-manage the company you're investing in, and always give yourself a "margin of safety".
Over the years, I've learned never forget the need for a "margin-of-safety", a term made popular by the late Benjamin Graham, who is sometimes referred to as "the father of value investing".
The "margin-of-safety" concept involves buying stocks that are oversold and deeply discounted (or under-appreciated) by traders and investors. As investopedia so aptly states it, a... "Margin of safety doesn't guarantee a successful investment, but it does provide room for error in an analyst's judgment."
Example of an "attractive" stock that appears undervalued
Let's start with Pan American Silver (PAAS). With over 30 years of experience, PAAS explores, develops, and operates silver producing properties and assets. The shares are selling for less than 7 times current earnings and less than 9 times forward earnings.
PAAS not only produces silver. it also produces and sells gold, copper, lead, and zinc. The company has seven mining operations in Mexico, Peru, Argentina, and Bolivia; the Navidad silver development project in Chubut, Argentina; and the La Preciosa joint-venture project in Durango, Mexico.
PAAS pays a small dividend, and its "book value per share" is around $15.25, yet the stock trades for less than $21-a-share. Its PEG ratio (5 year expected) is 0.84, and I believe the PEG ratio is an important determinant of true value now and going forward.
Look closely at PAAS's Balance Sheet. and you will see that it has a great deal more assets than liabilities, and zero long-term debt. When you read the company's web site, and especially its "Investors News" section, you'll discover a company that is experiencing record growth and sharing its success with its shareholders.
Another piece of exciting news for PAAS came out Wednesday, March 28. The Ontario, Canada Superior Court of Justice has issued a final order approving the previously announced plan where Pan American will acquire all of the issued and outstanding common shares of Minefinders (MFN). This will be accretive to earnings in a short period of time.
Minefinders is a precious metals mining and exploration company that operates the multi-million-ounce Dolores gold and silver mine in Mexico.
As of now, there are other attractively priced stocks too in the basic materials sector. These include companies like Apache Corp.(APA), AuRico Gold (AUQ), Chesapeake Energy (CHK), IAMGOLD Corp. (IAG) and Petrobras Brasileiro (PBR). AUQ has now announced the details concerning its 90%-128% "production growth profile".
Attractively-priced stocks from the tech sector
SWKS has a website that is fascinating and shows how this company makes money, mainly by offering analog and mixed signal semiconductors worldwide. The company provides power amplifiers and front-end solutions for cellular handsets from entry level to multimedia platforms, as well as smart phones. It has little debt, almost $258 million of levered free cash flow, and a PEG ratio (5-year expected) of less than 1. It's been around since 1962 and knows how to prosper.
BRCM is another very familiar, seasoned company that designs and develops semiconductors for wired and wireless communications. Selling at less than 12 times forward earnings, its PEG ratio is an even lower 0.85. Although it has $1.2 billion in debt, it has $1.84 billion in operating cash flow (TTM) and $1.24 billion in levered free cash flow .
BRCM makes what the smartphone and computer tablet industry needs, and with AAPL scheduled to sell yet another 60 million iPads worldwide in the year ahead, it should be a good year for BRCM.
With patience you may be able to buy some BRCM shares at $34 or below. When it comes to Skyworks Solutions, below $26-per-share would be a great entry price, unless it's taken over by a bigger predator, like Apple or Google (GOOG).
It's a challenge to find well-managed, "margin of safety" value stocks that have significant upside potential. Use the stocks mentioned in this article as potential examples, but always do your own "due diligence" before investing.