Value investors often find opportunities in unloved stocks and sectors. Of late, my focus has been centered on troubled companies like Telefonica (TEF), Total SA (TOT) and Frontier Communications (FTR). Telefonica, the Spanish telecom giant, is beset by fears rooted in the Spain's troubled fiscal condition, which still account for roughly 30% of earnings, Total is dealing with fall-out from the still-leaking Elgin gas platform and Frontier is struggling with declining revenue from its fixed-line business and uncertain prospects in a massive acquisition that has more than doubled the company's size. TEF and TOT are headquartered in countries with possibly a doomed currency while FTR and TEF have what analysts consider heavy debt loads even for a capital-intensive industry.
With these stocks gaining so much of my attention in recent weeks, I thought it may be nice to scour the market for stocks who aren't facing the end of the world, so to speak. With the market in a corrective mood in the last few days, I may get lucky and find an undervalued company with an impregnable balance sheet and strong business position.
Companies with no debt are in little danger of going bankrupt in the near future. In the interest of looking at stocks not facing existential crises, I added requirements that the companies must have registered cash flow growth over a 1 year and 3 year basis. I chose cash flow over revenue and earnings because the latter two metrics can be massaged. As the saying goes, cash doesn't lie. Thus my screen used the following criteria:
- stock trades on NYSE, NASDAQ, AMEX
- debt-to-capital <=0
- cash flow growth rate (3 yr) >= 0
- cash flow growth rate (TTM) >= 0
- large cap stock (market cap > $1.16B)
- p/cf between 0.01 - 10
My screen generated the following 10 names:
|Prices as of||4/4/2012|
|TICKER||COMPANY||Current Price||PE||PEG||EV / EBITDA|
|GTE||Gran Tierra Energy Inc (GTE)||$6.15||14.2||1.0||3.2|
|CRUS||Cirrus Logic Inc (CRUS)||$22.93||9.8||0.9||17.0|
|BPI||Bridgepoint Education Inc (BPI)||$24.20||8.4||0.5||3.6|
|ASNA||Ascena Retail Group Inc (ASNA)||$21.84||9.3||1.0||6.9|
|IAG||IAMGOLD Corp (IAG)||$12.20||6.1||1.9||4.9|
|HBM||HudBay Minerals Inc (HBM)||$10.58||N/A||1.7||3.0|
|PLCE||Children's Place Retail Stores Inc (PLCE)||$51.11||17.6||1.5||6.5|
|TNH||Terra Nitrogen Company LP (TNH)||$250.60||16.4||N/A||8.6|
|WMK||Weis Markets Inc (WMK)||$43.20||15.5||N/A||6.0|
|JCOM||j2 Global Inc (JCOM)||$27.20||11.4||1.1||7.5|
Readers can view in-depth financial metrics, including my very rough fair value estimate, here in spreadsheet format. All figures are pulled from online sources such as Yahoo Finance, Google Finance, etc. As screens are meant only to identify prospects for further research, these numbers have not been verified as that process would happen only if a stock passed this first round of inspection.
While none of these stocks are facing the dissolution of its reported currency or a possible bankruptcy, short interest ratios suggest some names face serious doubts from investors. Stocks with double-digit short interest include CRUS (17% of float), BPI (73%), PLCE (24%) and JCOM (25%). The shorts aren't always right, however.
Gran Tierra Energy is an independent international energy company engaged in oil and gas acquisition, exploration, development and production. GTE owns oil and gas properties in Colombia, Argentina, Peru and Brazil. It generated returns of 12% ROE and 10% ROI vs. industry averages of 11% and 11%, respectively.
Cirrus Logic develops high-precision, analog and mixed-signal integrated circuits for a range of audio and energy markets such as consumer and commercial audio and automotive entertainment. CRUS delivered 47% ROE (vs. peers' -2%) and 47% ROI (vs. 1%).
Bridgepoint Education, Inc. is a provider of postsecondary education services via wholly owned subsidiaries, Ashford University and the University of the Rockies. On a free cash flow basis, BPI looked the cheapest and most attractive of the 10 names turned up by the screen. Returns looked stellar as well, with the company delivering over 50% ROE and ROI while it's peers averaged under 10%.
Ascena Retail Group, Inc. operates as a specialty retailer of apparel for women and tween girls in the United States, Puerto Rico, and Canada. As of March 01, 2012, Ascena Retail Group operated approximately 2,500 stores. The company was formerly known as Dress Barn, Inc. Returns vs. industry lagged at 16% ROE and 13% ROI vs. peers' 18% and 16%.
IAMGOLD Corporation is a mining company with interests in five operating gold mines, a niobium mine, and a diamond royalty. IAMGOLD is focused in West Africa, select countries in South America and in the Canadian province of Quebec. The company reported 13% ROE, roughly inline with peers and 12% ROI, a little higher than the 10% industry average.
HudBay Minerals is a Canada-based diversified mining company, with assets in North, Central and South America. HudBay owns copper/zinc/gold mines, ore concentrators and zinc production facilities in northern Manitoba and Saskatchewan, a zinc oxide production facility in Ontario, among other assets. Low returns of 5% ROE and 4% ROI of indicative of the base metal mining industry in general as Hudbay's results are only marginally higher than industry averages.
The Children's Place is a pure-play children's specialty apparel retailer in North America. The Children's Place provides apparel, accessories and shoes for children from newborn to 10 years old. Returns lag the industry with 13% ROE and 11% ROI comparing unfavorably to peers' 18% ROE and 16% ROI.
Terra Nitrogen Company, L.P. produces nitrogen fertilizer products. The company's products anhydrous ammonia and urea ammonium nitrate solutions, which it manufactures at its facility in Verdigris, Oklahoma. Stellar returns of 127% ROE and 211% ROI along with a high dividend yield near 7% suggest this stock is one to keep tabs on if there should be a substantial market pullback.
Weis Markets is engaged in the retail sale of food principally in Pennsylvania but also surrounding states such as Maryland, New Jersey, New York, and West Virginia. It delivered 10% ROE (vs. peers' 9%) and 9% ROI (vs 6%).
j2 Global provides cloud services like online fax, virtual phone systems, hosted e-mail, e-mail marketing, online backup and customer relationship management. It markets its services principally under the brand names such as eFax, eVoice, FuseMail, Campaigner and KeepItSafe. JCOM generated 23% ROE and 21% ROI, beating industry averages of 7% ROE and 5% ROI.