With Thanksgiving done for another year, let’s bounce right back to business with Part 2 of my mini-series on overvalued and undervalued stocks.
In my last column, I talked about stocks whose current valuations exceed the health of the underlying companies, mentioning four overvalued stocks to avoid. Today, we’re going to focus on the undervalued side, revealing stocks that currently represent good value.
And in a market that has advanced as much as this one, digging up value stocks should be an important part of your portfolio. That’s because if the market corrects from here, value stocks should decline far less than stocks with higher valuations. On the other hand, if the indexes continue higher, value stocks have much more room for multiple expansion than their growth-based counterparts.
So let’s take a look at three that I believe are undervalued stocks…
Determining Good Value in Undervalued Stocks
To determine good value, I screened for stocks that boast the following:
- They’re trading below 10 times cash flow.
- Earnings and revenue growth are both above 10%.
- They’re increasing return on assets and have low debt.
Three of the Best Undervalued Stocks
And here are three of the best undervalued stocks…
- Corinthian Colleges (Nasdaq: COCO)
The higher education company recently reported strong earnings, with enrollments up due to the recession. And with unemployment still rising, COCO should enjoy strong performance over the next year or so, too.
The stock trades at just 13 times earnings, 8 times forward earnings, one times its sales and 5.2 times cash flow – way too low for a company whose earnings per share are expected to grow by 20% in 2010.
Additionally, short interest is huge – 32.7% of the float. And with seven out of 15 analysts rating it as either a hold or sell, COCO is an excellent contrarian pick, with plenty of upside, as short sellers cover and analysts upgrade the stock.
- EZCORP (Nasdaq: EZPW)
Ever since the company botched an acquisition in 2008, the stock has traded at cheap levels. However, that was over a year ago and in the current economic climate, you’d think that an operator of pawnshops and payday loans would trade at much loftier valuations. And with gold prices sky high, EZPW’s pawnshops are busier than ever.
It trades at 9 times cash flow and a remarkable 8 times forward earnings. If EZPW can trade in line with its peer - First Cash Financial Services (Nasdaq: FCFS), which trades at 12 times forward earnings – the stock would trade at over $20. That’s a 37% increase from current levels.
- InterDigital (Nasdaq: IDCC)
The designer of wireless technology products recently warned that its fourth quarter revenue would come in below expectations.
Nevertheless, the stock is trading at 8 times forward earnings – earnings that are expected to grow by 65% in 2010. Over the next five years, annual growth is projected to hit a robust 21%. Clearly, Wall Street isn’t giving enough credit to InterDigital’s earnings capabilities. The company has $10 per share in cash and no debt.
So even in a market that has soared since March, it’s still very possible to find good value out there if you know where to look.
Hoping your longs go up and your shorts go down,
Disclosure: No positions