Growth at a
reasonable cheap price is the holy grail for many investors. Rarely is it achievable, but when it is, hold on tight.
Half-expecting nothing to turn up, I recently ran a screen for companies expected to grow earnings by 25%+ over the next five years yet are trading at less than 10x forward earnings. Believe it or not, seven stocks popped off my screen:
|(BCS)||Barclays PLC||Foreign Money Center Banks|
|(HMC)||Honda Motor Co., Ltd.||Auto Manufacturers - Major|
|(MT)||Arcelor Mittal||Steel & Iron|
|(NJ)||Nidec Corp.||Industrial Electrical Equipment|
|(STX)||Seagate Technology PLC||Data Storage Devices|
|(TM)||Toyota Motor Corporation||Auto Manufacturers - Major|
|(VIP)||VimpelCom Ltd.||Wireless Communications|
I filtered out the small cap stocks because the anomaly is even rarer with larger, more established businesses. As with any screen, this is simply a first step in the research process. It is meant to help investors narrow down the massive universe of stocks into a group of potential candidates that deserve more in-depth research.
Below are the projected growth rates for these companies:
|Ticker||EPS growth next year||EPS growth next 5 years|
These stocks are trading at unbelievable valuations. Of course, this is not a solicitation to buy and you should consult a financial advisor before any investing decision, but these are intriguing valuations. In particular, BCS, MT and TM are all trading below book value:
If you're like me, you feel that risk is somewhat softened when you're paid to wait. If I'm wrong about an investment, I at least like to earn a little cash flow I can use to diversify out of the holding. Of course, the cashflow itself has to be sustainable so I pay attention to payout ratios. Based on the following, all but MT and VIP have reasonable payout ratios. STX in particular has an attractive dividend yield:
|Ticker||Dividend Yield||Payout Ratio|
Interestingly, STX also has strong profitability, based on its operating margin, ROA and ROE (below). STX is standing out as an interesting candidate - can it be too good to be true?
The other candidates all have fair profitability ratios. However, given their low valuations I suspect these stocks haven't blown the lights out over the past few years.
|Ticker||Operating Margin||Return on Assets||Return on Equity|
Finally, to help measure the sensitivity of EPS to the business cycle, below are the debt-to-equity ratios for these stocks. Higher ratios indicate greater sensitivity to fluctuations in revenues. VIP appears heavily leveraged, while the other stocks use reasonable amounts of debt. NJ has the least leverage of them all.