Scanning for Bargains in Consumer Stocks

Includes: EBAY, WBA
by: Ockham Research

Wednesday we put our screener tool to work on stocks in the consumer services sector looking for the most appealing stocks for value investors for further investigation. As you might expect we have sorted these stocks according to the Ockham valuation methodology, and filtered out stocks smaller than $1 billion in market capitalization. Among the 171 medium and large cap retailers, restaurants, etcetera that we cover, we were surprised to see only 13 received either Undervalued or Greatly Undervalued ratings according to our methodology. We have listed them below according to their valuation scores.


Undervalued Consumer Stocks

  1. eBay, Inc (NASDAQ:EBAY)
  2. 99 Cents Only Stores (NYSE:NDN)
  3. Supervalu (NYSE:SVU)
  4. Wal-Mart Stores (NYSE:WMT)
  5. Gamestop Corp. (NYSE:GME)
  6. J. Sainsbury plc (OTCQX:JSAIY)
  7. Walgreen Company (WAG)
  8. Burger King Holdings (BKC)
  9. Melco Crown Entertainment (MPEL)
  10. Home Inns & Hotels Management (NASDAQ:HMIN)
  11. Tabcorp Holdings
  12. Tech Data Corp. (NASDAQ:TECD)
  13. Lowe’s Companies (NYSE:LOW)

Among the 13 consumer stocks which we currently rate as Undervalued or better, we see only one whose valuation stands out above the rest. The only stock in this screen that receives our most bullish Greatly Undervalued rating is the web auctioneer, retailer, and payment processor eBay (EBAY). If you compare eBay’s current valuation to the way the market has historically valued shares it is easy to see why we see the stock in a positive light. For example, over the past ten years the market has normally awarded EBAY a price-to-cash earnings of between 32.8x to 60.1x, but the current valuation is just 13x cash earnings. Even if you believe earnings growth will slow over the coming years, the stock is currently trading at less than half of the low end of the historically normal price-to-cash earnings level. Furthermore, a current price-to-sales per share level of 3.1x may seem expensive compared to other stocks, but it is not expensive in the context of eBay’s historical valuation range of 5.7x to 11.1x sales per share.

eBay recently traded as high as $28 per share, but a conservative outlook during its latest conference call in combination with the overall market’s decline have brought shares into the low twenties in just a few weeks time. We believe the valuation is as attractive as a long term investor would be able to find in the consumer services sector. Among the other stocks on the list are a number of quality stocks that we have written about in the past. For example, Walgreen (WAG) was one of the stocks we selected last August when asked by a special feature in Forbes for the five stocks that Ben Graham would buy in this market. The stock has only appreciated about 10% since then so it is not too late.

Overall this is not one of our favorite sectors at this time, but these stocks are the most attractive stocks in the bunch. Of course, investors should always do there own research before buying, but this list may offer some ideas as a starting point.

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