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  • 5 Undervalued Stocks With ROE Above 20% 0 comments
    Sep 11, 2012 10:59 PM | about stocks: F, INTC, AAL, TPX, WU

    One way of identifying when a stock is undervalued is to look at the variety of price multiples available and compare it to industry peers as well as to it's own historical average. But there is no indication of a company's prospects by looking only at the price multiple.

    Another way to evaluate whether a company is undervalued is to look at the PEG ratio. The PEG ratio is a relative measure of valuation compared to the future earnings forecast of the company. While future earnings may change and analysts are often inaccurate, a PEG ratio of less than 1 indicates that the PE multiple of the company's current stock is below the expected earnings growth for the company over the next year. This may be considered an undervalued company. A PEG ratio of greater than 1 indicates that the current PE is greater than the expected earnings growth for the company over the next year.

    With this in mind we looked for companies with PEG ratios below 1 and also complemented that criterion with a return on equity of more than 20%. In addition, we wanted to identify those companies with positive analyst ratings so we evaluated only those companies with an average of an overweight by wall street analysts.

    Return on Equity - Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It can be broken down into three components, which are all captured by the ROE metric. They are operational efficiency, asset management, and financial leverage. For example, Net Income/Sales is the net profit margin, which indicates the company's operational efficiency; Assets/Equity is called financial leverage, and Sales/Assets is the asset turnover component. Together they measure how well a company is run, and by multiplying all three of these components, we arrive at ROE.

    Take a look at the following 5 stocks and determine for yourself if they are attractive additions to your own portfolio:

    1. Intel (NASDAQ:INTC)

    Intel is one of the largest chipmakers in the world, and while they are dominant in the desktop business, they supply manufacturers of mobile phones, tablets, and other electronic devices as well.

    Intel lowered their Q3 guidance this week so while it's inclusion on this list may raise some eyebrows, we included it anyway because of the heavy change in insider ownership over the previous 6 months. It will be interesting to see how the stock reacts from now until the end of the year as we better understand why insiders may have been bullish on the stock. Perhaps, and this is just a guess, insiders still think the stock is undervalued despite the lowered guidance.

    (click to enlarge)

    2. Ford (NYSE:F)

    Ford Motor Company (NASDAQ:FORD) is a producer of cars and trucks. If you had heard Jennifer Granholm's speech during the Democratic National Convention, you'd be buying up Ford stock all day long. Ford has come a long way since it's near collapse a few years ago. And while revenue isn't quite back where it was in 2007, it has shown respectable increases in revenues from 2009 to 2011 in a very tough economic environment. As economic conditions improve, look for Ford to continue to do well.

    (click to enlarge)

    3. Tempur-Pedic International Inc. (NYSE:TPX)

    Tempur-Pedic International Inc. is a manufacturer, marketer and distributor of premium mattresses and pillows, which it sells in approximately 80 countries under the TEMPUR and Tempur-Pedic brands.

    This stock is down 39% YTD, but has recovered dramatically in the last 3 months. No wonder insiders are buying it up. TPX reported worse than expected numbers earlier this year and the stock tumbled on the news. Now, housing seems to be on the mend, and when people buy homes, they typically replace their mattresses. If the trend continues, TPX may benefit.

    (click to enlarge)

    4. U.S. Airways (LCC)

    US Airways Group, Inc. (US Airways Group) is a holding company whose primary business activity is the operation of a network air carrier through its wholly owned subsidiaries, US Airways, Piedmont Airlines, Inc. (Piedmont), PSA Airlines, Inc. (NYSE:PSA), Material Services Company, Inc. (NYSEARCA:MSC) and Airways Assurance Limited (NASDAQ:AAL).

    This may also be another comeback story in the making. After going nowhere for about 4 years, LCC seems to be making a move over the last month. It has gone from $10-$12 in a matter of weeks and with insiders buying the stock undervalued, it may be a good opportunity to invest.

    (click to enlarge)

    5. Western Union Company (NYSE:WU)

    The Western Union Company (Western Union) is engaged in money movement and payment services. Need to send money fast? That would be Western Union.

    Despite increased competition from Paypal and American Express, billionaire Leon Cooperman continues to buy shares. The stock has been so beaten down that any growth at all would make this a great investment. And the company had 4% revenue growth and 3% income growth compared to comparable periods in 2011.

    (click to enlarge)

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    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: F, INTC, AAL, TPX, WU
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