Finding Value in the Cheapest Large Cap Stocks

Jan. 24, 2011 4:37 AM ETRSH, HUM, ELV, AET, HNT-OLD, STX, WDC, AOL, PRDO, APOL, GHC, ESI-OLD, IVV4 Comments
Whopper Investments profile picture
Whopper Investments
3.06K Followers

Following is a list of the 27 cheapest stocks from the Russell 1000 (on an EV / EBITDA basis), as well as their P/E and market cap.

Ticker EV/EBITDA Market Cap P/E
HUM 0.63 9.7B 7.3
AAN 2.23 1.7B 14.6
WLP 2.51 24.2B 9.4
WDC 2.6 7.3B 6.7
AOL 2.62 2.6B 27.7
OSK 2.67 3.9B 4
MU 2.81 9.6B 7
STX 2.96 6.3B 5.7
ESI 3.21 2.2B 6.2
LXK 3.36 2.8B 7.5
CECO 3.41 1.8B 7.4
APOL 3.47 6.2B 7.8
TLAB 3.59 2.5B 12.6
DFS 3.6 11.1B 16.7
CVH 3.64 4.3B 8.5
WPO 3.69 3.7B 11.7
UFS 3.71 3.3B 7.9
VSH 3.87 2.5B 12.1
TSN 3.93 6.5B 7.9
CCE 3.93 8.5B 13.3
TER 3.94 2.5B 8.6
RSH 3.95 2B 9.9
CKH 3.97 2.2B 9.9
CSC 4 8.2B 10.4
GME 4.01 3.2B 8.7
AET 4.15 13.2B 9.6
HNT 4.16 2.7B 13.7

Several of the names jump out at me as interesting value candidates

Radioshack (RSH)

I feel like I’ve been talking about RSH non-stop (see here, here, and here). However, that’s because shares are just so cheap. The company has shown up on (almost) literally every value screen I have run in the past two weeks. The company has tremendous ROIC, ROE, margins, etc. and is exposed to the booming smart phone market, but trades like a distressed retailer with an EV / EBITDA of under 4. They recently completed a $300m accelerated share buyback, so management clearly sees some value here.

Humana (HUM), Wellpoint (WLP), Coverntry (CVH), Aetna (AET) and Health Net (HNT)

Ok, you caught me. This was a list of the 25 cheapest stocks on the Russell 1000, but I expanded it to grab Aetna and Health Net. Shares of all these companies have been beaten down over fears of health care reform (and the EV basis can be a little skewed by the float carried on their books), but all five of these companies are cheap. Humana, for instance, trades for just over 7 times earnings despite consistent ~20% ROE for the past 5 years, and the other insurers have similar characteristics. It might make sense to approach the group as a basket play, buying an equal amount in all of them and betting that they will survive (and possibly thrive) health care reform.

Seagate (STX) and Western Digital (WDC)

Another potential basket play, both companies produce “data storage” devices (hard drives). The two companies are fierce competitors and compete neck and neck for first place in the still growing (project unit growth rate of 5.6% through 2013) data storage market. To date, returns for both companies have been insane (ROE of 30%+ for WDC and over 60% for STX) and they both have large net cash positions. Shares have been crushed over somewhat weak outlooks recently, but the low prices have attracted private equity buyers and even a strategic merger.

AOL (AOL)

While their future strategy is in question, shares of the former internet giant are cheap. Listen to this stat - AOL generated ~$620mm in TTM cash flow, yet trades for an EV of just $2.1b. Merger talks continue to dominate the internet world (Google-Groupon? Facebook IPO? Apple buying Netflix? Yahoo-AOL? It seems that every internet company has rumors of it being in play once a month). They still own several valuable brands (MovieFone, MapQuest) , their online properties have a lot of traffic, and their cash ROIC is very strong.

Career Education (CECO), Apollo Group (APOL), Washington Post (WPO) and ITT Educational (ESI)

Much like the health insurers, shares of the for profit education group have been crushed over concerns about government reimbursement and a murky outlook for their future. However, the companies are all still very profitable right now (again, great ROE and ROIC) and in general have strong, net-cash balance sheets (for example, CECO has ROE of ~23% and over a fifth of its market cap in cash). Again, a basket play of the companies could be very successful - provided the government doesn’t completely shut the firms down. Their core business model should continue to benefit from great economies of scale and returns on capital.

Disclosure: I am long RSH.

This article was written by

Whopper Investments profile picture
3.06K Followers
A small, individual investor, I mainly focus on deep value micro and nano - cap companies. I especially enjoy investing in net-nets and stocks with upcoming catalysts.

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