The most obvious investment strategy is to buy low and sell high. The trickier part is weeding through all of the choices to find the ones that are priced below their market value, yet are showing signs that they will be moving upward in value soon. To find viable stocks of this nature, we focused on profitability in the tech sector. The idea is that strong profits over the past year indicate a company is operating effectively. We then selected stocks that appear to be undervalued from a price-multiple perspective. Take a look at our short list below to see if any capture your attention.
EPS growth (earnings per share growth) illustrates the growth of earnings per share over time. EPS growth rates help investors identify stocks that are increasing or decreasing in profitability. This profitability metric is generally a key driver in the price of the stock as it directly correlates to the profitability of the company as a whole.
Return on Equity [ROE] is one way to identify great potential names relative to profitability. This ratio illustrates the percentage return on shareholder equity. As well, this metric segments the company into operational efficiency, asset use efficiency, and financial leverage. Why does this matter? Simply put, it allows investors to get a real picture of how the company is generating these returns and helps identify parts of the company that may be underperforming.
The PEG ratio (price/earnings to growth ratio) is a valuation metric for determining the relative trade-off between the price of a stock, the earnings generated per share [EPS], and the company's expected growth. In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates. A lower ratio is 'better' (cheaper) and a higher ratio is 'worse' (expensive) - a PEG ratio of 1 means the company is fairly priced.
The Price/Sales ratio is a price-multiple valuation metric used to help identify if a firm is cheap by its twelve month trailing sales numbers. In the most basic terms it lets an investor know how much the investment community is willing to pay for every dollars worth of sales. A firm with a P/S ratio of one or lower would be viewed as cheap because investors are paying $1 or less for every dollars worth of a firms sales. On the other hand, a firm is generally considered to be expensive when the P/S ratio is above three. These are general guidelines used by the investment community not hard rules to be clear. Price/Sales Ratio = Current Stock Price/Revenue (sales) per Share
We first looked for technology stocks. We then looked for businesses that have shown strong bottom line growth over the last year (1-year fiscal EPS growth rate>10%)(ROE [TTM]>30%). We then looked for businesses that are undervalued when company growth rate is taken into account (PEG Ratio < 1)(P/S<1). We did not screen out any market caps.
Do you think these stocks will perform well? Use our screened list as a starting point for your own analysis.
1) Vonage Holdings Corporation (NYSE:VG)
|Industry:||Diversified Communication Services|
Vonage Holdings Corporation has an Earnings Per Share Growth Rate of 524.43%, a Return on Equity of 312.48%, a Price/Earnings to Growth Ratio of 0.27, and a Price/Sales Ratio of 0.56. The short interest was 4.12% as of 08/16/2012. Vonage Holdings Corp. provides broadband communication services in the United States, Canada, and the United Kingdom. The company offers voice and messaging services through session initiation protocol (SIP) based voice over Internet protocol network.
2) Telecom Argentina S.A. (NYSE:TEO)
|Industry:||Diversified Communication Services|
Telecom Argentina S.A. has an Earnings Per Share Growth Rate of 29.87%, a Return on Equity of 31.84%, a Price/Earnings to Growth Ratio of 0.49, and a Price/Sales Ratio of 0.55. The short interest was 1.42% as of 08/16/2012. Telecom Argentina S.A., together with its subsidiaries, provides telecommunication services to residential customers, businesses, and governmental agencies in Argentina and internationally. It operates in two segments, Fixed Telephony and Mobile Services. The Fixed Telephony segment provides local fixed telephony, public telephony, domestic and international long-distance telephony, domestic and international point-to-point link, domestic and international telex, data transmission, videoconferencing, and broadcasting signal services; additional services, including call forwarding, call waiting, three-way calling, itemized billing, and voicemail; and Internet access in Argentina.
3) GT Advanced Technologies Inc. (GTAT)
|Industry:||Semiconductor - Specialized|
GT Advanced Technologies Inc. has an Earnings Per Share Growth Rate of 17.31%, a Return on Equity of 47.80%, a Price/Earnings to Growth Ratio of 0.45, and a Price/Sales Ratio of 0.72. The short interest was 23.78% as of 08/16/2012. GT Advanced Technologies Inc. provides polysilicon production technology and crystalline ingot growth systems, and related photovoltaic (PV) manufacturing services for the solar industry worldwide. It also offers sapphire growth systems and material for the light emitting diode (LED) and other specialty markets. The company's principal products comprise silicon deposition reactors and related equipment, which are used to produce polysilicon for applications in silicon-based solar wafers and cells; directional solidification (DSS) furnaces and related equipment used to cast multicrystalline and MonoCast crystalline silicon ingots, which are used to make PV solar wafers and cells; and sapphire crystallization furnaces, which are used to crystallize sapphire boules for use in the manufacture of LED devices.
4) SouFun Holdings Ltd. (NYSE:SFUN)
|Industry:||Internet Information Providers|
SouFun Holdings Ltd. has an Earnings Per Share Growth Rate of 57.13%, a Return on Equity of 90.58%, a Price/Earnings to Growth Ratio of 0.52, and a Price/Sales Ratio of 0.74. The short interest was 0.91% as of 08/16/2012. SouFun Holdings Limited operates a real estate Internet portal in the People's Republic of China. It offers marketing services primarily through advertisements on its soufun.com Website to real estate developers in the marketing phase of new property developments, as well as to real estate agencies and other home furnishing and improvement vendors who wish to promote their products and services, including home furnishing and improvement products and services, furniture, electronics, and other products. The company also intends to integrate paid priority placement of customer links in keyword search results into its current search and search ranking services.
Company profiles were sourced from Google Finance and Yahoo Finance. Financial data sourced from Finviz.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.