Dig Deeper to Find Hidden Value GemsJune 05, 2009 | Comments : 0 Recommended this article: (0)
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Do you have guts?
That's what it takes to be a value investor amidst one of the sharpest 3-month stock market rallies Wall Street has ever seen.
Just a few months ago, value investors were riding high. The markets were hitting new multi-year lows. Price-to-earnings ratios were plunging.
For value investors, bear markets are usually stock picking paradises as equities move out of favor with investors and leave good quality companies available at rock bottom prices.
But a funny thing happened. There was a massive rally which lifted all stocks, especially growth stocks, and now it appears that there's not much "value" in the markets. For big returns, many investors are pouring into growth.
All is not lost, however. Value investors just have to dig a bit deeper to find the solid companies that will provide the best returns for their portfolios.
Start with a low P/E
Value investors seek companies selling for under their intrinsic value.
The best place to start looking for value stocks is in the price-to-earnings ratio. In recent months, it's been more difficult for investors to correctly value a company because earnings have been falling and earnings forecasts have been cut.
However, now that we're nearly 6 months into the year and deep into the economic crisis, many companies are seeing a clearer picture of what sales and earnings will look like for the rest of 2009. This makes the P/E multiple now more reliable. Look for a P/E ratio that is as low as possible.
Yearning for some "growth" to go along with your "value"?
It's possible a value investor could have both value and growth in the same stock.
Recently, I've been finding myself competing with my aggressive growth stock colleague, Bill Wilton, for coverage of the same stocks. He wants to cover a company for aggressive growth and I want to cover the same company for value. How could that be?
Growth and value are overlapping because the growth stocks were crushed in the market sell-off earlier this year and now have value characteristics.
Market conditions have created a rare opportunity for value investors to pick up stocks that are also growing quickly.
Value investors can look to the PEG ratio to find undervalued stocks that have higher growth rates. The PEG ratio is calculated by taking the price-to-earnings ratio and dividing it by earnings per share growth.
The earnings per share growth rates can be found on Zacks.com under the estimate page for a particular stock.
A PEG ratio under 1.0 symbolizes a company is undervalued. You can also find the PEG ratios on the quote page of Zacks.com.
Value stocks exist in any market
Even with the big market rally, attractive value stocks still exist. It might take a little more work to find them, but your portfolio will thank you when you do.
Dig a little deeper. The reward for value investors is finding that one company with great fundamentals that the market is ignoring and seeing the big gains when the market finally "gets it."
3 value stocks with double digit growth rates
FUQI International, Inc. (FUQI), the luxury Chinese jewelry manufacturer, saw revenue jump 41% in the first quarter as the jewelry market in China remained hot despite the global economic slump. It has a forward P/E of just 7.5. The PEG ratio is a very low 0.32. Analysts expect year-over-year earnings growth of 24.05%.
NewMarket Corporation (NEU), the specialty chemical additives manufacturer, saw a record first quarter as quickly declining raw material prices boosted operating profit. It has a forward P/E of 13.7. Its PEG ratio is only 0.83. Analysts expect strong year-over-year earnings growth in 2009 of 31.37%.
Almost Family, Inc. (AFAM), the provider of home health and personal care, reported a terrific first quarter that saw revenue jump 77% year-over-year. The company has a forward P/E of only 9.9. Its PEG ratio is 0.42. Analysts expect year-over year earnings growth of 26.04%.
Tracey runs the extremely popular Zacks Value Trader and Value Trader 2 alert services.
In fact, the original Value Trader grew so popular and successful we've had to close it to new members. During busts and booms, it continues to find those "attractive value stocks" that Tracey refers to in her article. Since inception, even while the market plunged -33.9%, this strategy was up +7.7%. With better times, value stocks may be harder to find, but when you do, the sky's the limit.
IMPORTANT: We've re-opened the Value Trader service to a limited number of new investors – but only until 11:59 pm tonight. Today, June 6, is D-Day for value investors . . .
Click right now to learn more.
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