Companies are generally valued based on either the discounted value of future cash flows, peer price-earnings multiples, or a combination of the two. Using this knowledge, one of the best ways to find investment opportunities may be to look for low price-earnings multiples relative to peers and high free cash flow generation, as well as cash in the bank. Additionally, stable companies that are well managed tend to have a low debt-to-equity ratio and a high return on investment, among other things, which combine to make a great investment.
Using these screening criteria, the following six U.S. companies were returned:
- Ballantyne Strong Inc. (BTN)
- ClearOne Communications Inc. (CLRO)
- MKS Instruments Inc. (MKSI)
- Momenta Pharmaceuticals Inc. (MNTA)
- Sutron Corporation (STRN)
- Western Digital Corp (WDC)
Of these six companies, I believe that Ballantyne Strong, MKS Instruments and Western Digital represent the best opportunities, given their market capitalizations, trading liquidity, and recent price trends (e.g. they aren't in a downward spiral).
Taking a Closer Look at the Three Top Picks
- Ballantyne Strong Inc. provides equipment and services to the theatre exhibition industry worldwide. With an $83.5 million market capitalization, the small company trades with a price-earnings multiple of just 8.19x, despite posting 13.7% earnings growth last quarter, according to Yahoo! Finance. Notably, the company also has no debt and $39.89 million in cash, according to the same source.
- MKS Instruments Inc. provides instruments and solutions that control and analyze manufacturing processes. With a $1.5 billion market capitalization, the company trades with a price-earnings multiple of 11.28x. The firm's earnings fell last quarter, but a recovery in the semiconductor sector could reverse that trend and investors can receive a dividend yield in the meantime. Notably, the company also has about $10.77 per share in cash with a debt-to-equity ratio of just 0.2, according to Yahoo! Finance.
- Western Digital Corp. provides storage solutions for digital content and recently acquired Viviti Technologies as well. With a $9.2 billion market capitalization, this is the largest company in the group and trades with a price-earnings multiple of just 13.5x. The firm saw a modest drop in its earnings last quarter as well, but the company has $16.70 per share in cash with a relatively modest debt-to-equity ratio, according to Yahoo! Finance.
Other Things to Keep in Mind
Cheap stocks are often cheap for a reason, but that reason can be overplayed. In these cases, the companies may have suffered modest quarterly losses (in two cases), but they are well positioned to weather the storm and recover with their low debt and high cash reserves. As a result, these are stock that may be worth considering.
That said, investors can take some precautions in order to protect themselves from additional downside. For instance, writing covered call options is a great way to lower your invested capital (and breakeven point) over time, while only giving up predefined upside. Alternatively, hedging with a put option on a related ETF is another way to offset some of the risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.