CHICAGO, March 21, 2011 /PRNewswire/ -- Zacks.com Analyst
Blog features: Vale S.A. (NYSE: VALE), Gazprom (OTC:
GZPFY), Dole Foods (NYSE: DOLE), Dillard's (NYSE:
DDS) and Ness Technology (Nasdaq: NSTC).
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Here are highlights from Friday's Analyst Blog:
Find Inexpensive Strong Buys
Regular visitors to Zacks.com know that the single most powerful
indicator of near-term performance is the Zacks rank. If you could
buy all the Zacks #1 Ranked firms and then sell them as soon as
they were no longer #1s, you would make a fortune before
transactions costs. Your broker would also make a fortune after
transactions costs.
A good discount online brokerage account helps in that regard,
but it would also be nice to buy some good cheap stocks that you
can hang onto for awhile. To actually invest -- rather than just
trade and speculate.
Look Toward Valuation
Academic studies have shown over and over again that valuation
matters. Over the long haul, cheap stocks do much better than
expensive ones. Another way of thinking about it is, "How can I
pick up very cheap companies at a time when they are poised for
some great near-term performance?"
The two most common metrics of value are the P/E and the
price-to-book value. How much are you laying out for the next
year's earnings, and how much are you paying relative to the
company's assets (minus its liabilities)? Both have been shown to
be strong predictors of long-term performance.
But which one to go on? Well how about both? I used a very
simple method to combine them: I multiplied. Each of the companies
below has a product of their FY1 P/E and price-to-book that is less
than 18. In other words, if the P/E based on 2011 earnings is 12,
the price-to-book value has to be under 1.50. If the P/E is 6.0,
then the P/B can go as high as 2.99.
EV/EBITDA
To narrow down the list, I also looked at a valuation measure
that is a favorite of the private equity types, the enterprise
value-to-EBITDA ratio. Enterprise value is the company's market
capitalization plus its long-term debt, minus the cash on its
balance sheet. That is the price you would have to pay to own the
whole company (not including any takeover premium).
EBITDA is earnings before interest, taxes, depreciation and
amortization over the last 12 months. In other words, how much cash
is flowing into the company that would be available to service its
debt if you decided to lever up the company to take it private.
I required that the EV/EBITDA ratio be below 10, or that the
EBITDA yield was greater than 10%. With long-term risk-free rates
(10-year T-note) at under 3.30%, that is ample margin for a LBO
firm to be able to borrow cheaply enough for the company to be able
to service, and pay down the debt taken on to buy the company.
My other two requirements were that the company have a Zacks #1
Rank, which puts it in the top 5% of all stocks in regard to
estimate momentum, and that it have a market capitalization of more
than $100 million.
What I find striking about the list of companies on it is how
diversified a portfolio one creates this way. You want some
exposure to basic materials, fine, there is Vale S.A. (NYSE:
VALE), the world's largest producer of iron ore, and a major
producer of other important metals. Energy? Well how about
Gazprom (OTC: GZPFY), one of the largest producers of
natural gas in the world.
Maybe a nice boring food company like Dole Foods (NYSE:
DOLE) would be a tasty addition to your portfolio. A
retailer? There is Dillard's (NYSE: DDS). You can also
find a pair of shoe companies and some tech exposure as well, such
as Ness Technology (Nasdaq: NSTC).
In other words, it is not just one type of company that is both
cheap and has some estimate momentum behind it, but a broad
spectrum of firms. Of course, as with any screen, this should only
be a starting point for your analysis. If you want a nice
combination of value and estimate momentum, this would be the right
place to start.
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