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Stock Screen: Bargain Basement Stocks – April 29, 2011
The investing world is often broken down into two broad camps: growth and value. The growth group looks for companies with earnings that are advancing at a material clip. The value camp, meanwhile, looks for stocks that are trading on the cheap. The desire to find cheap stocks is both emotionally and intellectually appealing—after all, who doesn’t like to take advantage of a sale? Moreover, value investing follows one of the oldest, and most obvious, sayings on Wall Street, “buy low, sell high.”
The problem is that everyone is trying to buy low and sell high, even the growth investors. So it’s important to properly define “cheap” and have a systematic way of identifying candidates that meet that criteria. Equally paramount is remembering that some merchandise winds up on the sale heap because it is damaged in some way. A fact that is as true for stocks as it is for consumer goods.
To help investors cull through the list of potential investments, Value Line provides weekly screens. One of the more useful screens for value investors is the Bargain Basement Stocks screen. The screen is fairly simple, highlighting companies with price to earnings multiples and price to “net” working capital ratios near the bottom of the Value Line universe. The idea is to identify companies that are trading cheaply relative to earnings and to the money that would be “left over” if the company were to be liquidated. Note that most stocks never trade below their liquidation value, but even trading at two or three times that value is noteworthy.
This screen is available every week in the Index section of The Value Line Investment Survey. Some recent names of interest that percolated to the top, or the bottom as the case may be were Tech Data (TECD), Advanced Energy (AEIS), and Power-One (PWER).
Tech Data Corporation is a leading distributor of microcomputer-related hardware and software products to value-added resellers and computer retailers throughout the Americas (43% of 2010 sales; 57% of operating income), Europe and the Middle East (57% of sales and 52% of operating income). It distributes more than 150,000 products and sells to over 125,000 customers.
Value Line analyst David Cohen notes that the global rebound in expenditures for IT (information technology) and high-end consumer electronics, along with contributions from acquisitions and expanded offerings, particularly in the area of data centers, have been key catalysts fueling Tech Data’s upward top-line momentum since late 2009. Too, the advent of cloud computing has resulted in the accelerated evolution of software and product requirements in that space. Mr. Cohen looks for the strength to continue, and recently increased his fiscal 2011 bottom-line estimate (ends January 31, 2012) for the distributor.
Moreover, Mr. Cohen believes that Tech Data's top- and bottom-line growth prospects to 2014-2016 are sound, as its sales should continue to be bolstered by expanding partnerships with leading vendors, as well as new product and service offerings and geographic expansion. Margin expansion and a lower share count should also be beneficial.
Advanced Energy Industries, Inc. develops and produces power conversion and control systems that are used by manufacturers of semiconductors and in industrial thin-film manufacturing processes. The company’s largest customer, Applied Materials (AMAT), accounts for about 25% of sales.
On the heels of an impressive sales and earnings recovery last year, Advanced Energy is poised to make considerable gains this year as well, albeit at a slower pace than in 2010, according to Value Line analyst Kenneth DeFranco. He notes that the semiconductor component manufacturer has benefited largely from its ongoing foray into the renewable inverter markets, and that its expansion into the solar inverter segment has propelled the business to a leading position, where it has generated marked sales growth. Although Mr. DeFranco looks for the momentum is to slow a bit over the next few quarters, he believes that the company will post a double-digit percentage earnings gain this year.
Power-One, Inc. makes power supplies (including AC/DC converters and voltage power switches) for use in communications, automatic testing, medical, industrial, and other electronic equipment. The company’s products are sold through electrical component distributors, and foreign sales accounted for 88% of 2010 revenues.
Value Line analyst Nira Maharaj notes that although demand for power inverters has been strong, Power-One’s near-term outlook has been tempered. Indeed, the company expects somewhat tepid sales growth for the first half of the year, based on cutbacks of feed-in-tariffs (government subsidies) in Italy and Germany, as well as an oversupply of inverters in Germany.
However, Ms. Maharaj believes that new products and services, combined with geographic expansion, will enable top- and bottom-line growth. To wit, the company intends to roll out regionally specific products in China by yearend, and bookings in India for solar and other renewable energy products are under way. Power-One is also offering value-added services, such as extended warranties and work repair programs.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.