Price to Earnings ratio provides a useful indicator of valuation. While one should never rely on just one indicator to make investment decisions, this is a good starting point to find stocks to buy, specially when it is paired with other filters.
In this screen, in addition to a Price to Earnings multiple below 15, I have also considered the earnings growth rate, both past and projected, profitability and kept the screening to stocks with market caps greater than $50 million but less than $1 Billion. This gives us a list of companies that are potentially undervalued with good earnings growth. As is normally the case at Value Stock Guide, I prefer to focus on small cap stocks.
This is a Level 1 screen, which means further diligence is needed before any of these stocks can really be considered a candidate for investment.
1. Rubicon Technologies (RBCN) – Rubicon Technologies is a semiconductor company that manufactures crystalline products for opto-electronic applications (LEDS, RFICs, Laser diodes, etc). The Illinois based company stock trades at 4.53 P/E ratio and 1.19 Price to Book. The stock commands a $227 market value, and is down over 17% today as it reported an earnings miss and a weak outlook next quarter due to excess inventory in the LED supply chain. This may be a great time to get in the stock on weakness and wait for the inventory glut to work itself out.
2. BRT Realty Trust (BRT) – BRT Realty Trust is a REIT that invests in mortgage loans secured by commercial and multifamily real estate properties. The company is based out of Great Neck, NY. The stock trades at a PE ratio of 8.49 and a P/B ratio of 0.66. The dividend history is spotty, but the trust is profitable and a lot of the investment thesis depends on your assessment of the risk in the mortgage loan portfolio the trust holds.
3. Integrated Silicon Solution, Inc (ISSI) – ISSI is a fabless semiconductor company that designs and markets memory chips for various consumer applications. The stock currently trades at a PE ratio of 5.89 and a P/B ratio of 1.23, which is quite good. The stock is currently weak as the semiconductor industry stays weak. The $295 million market value is supported by $95 million in cash on the books. With no debt, the company has a balance sheet to weather the current storm and should be a good investment at current prices.
4. Perion Network Ltd (PERI) – Formerly known as IncrediMail, the company is based out of Israel and provides email software products and other various social expression products for home and consumer markets. The company is profitable, with a P/E ratio of 7.44. The company expects a revenue growth of more than 30% in 2012 so it is worth to keep an eye on the stock.
5. Oplink Communication (OPLK) – The $340 million market value semiconductor company makes and sells optical networking components worldwide. The trailing P/E ratio of 10.55 and the forward P/E ratio of 18.83 should be adjusted with the excess cash the company has on the books in the amount of $174 million. In a soft market for its products, it is wise to gravitate towards companies that sport a strong balance sheet.
6. Transglobe Energy Corp (TGA) – TGA is an oil exploration and production company from Calgary, Canada with interests in Egypt and Yemen. The stock is priced at 14.82 P/E giving it a market value of $812 million. This could be an interesting stock for investors looking for energy exposure.
7. Fairpoint Communications (FRP) – FairPoint Communications, Inc. provides communication services to residential and business customers in rural and small urban communities primarily in northern New England. Its services include local and long distance telephone, broadband access, and television. The company is currently valued at $114 million at a PE ratio on 1.1 and a Price to Book multiple of 0.67. The company does have high debt load and has been unprofitable for years but had significant tangible assets so it can make for an interesting value investing study.
Many of these companies are undergoing issues that have depressed their stock. In some cases, these problems may be temporary, in which case these prices may just yield some terrific stock picks. In some other cases, there may be a fundamental problem with the business in which case a greater deep dive is required. Even a distressed company may be a good investment if the liquidation value exceeds the current market value, so it is always a good idea to investigate these stocks further.