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Tickers in this Article: LYG, WDC, PCP, APD, KCI
If you're one who believes in the mantra "buy it when nobody else wants it, and sell when everyone else wants to buy", you're probably loving life right now. Investors seem to have thrown out the baby, the bathwater, the bathtub and the soap. However, that hasn't prevented some companies from succeeding despite a tough economy, and despite what their stock prices may suggest.

Given their unique ability to perform under duress, I think many of these same companies are offering up undervalued stocks. The trick, as always, is finding them.

In this round of research I came up with a handful of companies using some rigorous fundamental criteria and a common sense filter. Five stocks passed my test, each for a different fundamental reason (though all of them were impressive on all fundamental fronts).

Here is the list:

  • Lloyds TSB Group PLC (NYSE:LYG)
  • Western Digital (NYSE:WDC)
  • Precision Castparts Corp. (NYSE:PCP)
  • Air Products & Chemicals Inc. (NYSE:APD)
  • Kinetic Concepts Inc. (NYSE:KCI)
Next, let's have a look at why each of these companies stands out.

Price to Sales - Lloyds
Comparing a company's market cap to its revenue was initially done to allow for an "apples-to-apples" comparison when a company wasn't yet producing positive earnings. I've found it to be a solid tool even for profitable companies, though, since there can often be more to the story than earnings. U.K.-based financial services firm Lloyds TSB Group PLC (NYSE:LYG) is impressive when it comes to both of those measures, but a trailing price-to-sales reading of 0.96 is uncanny.

Price to Earnings - Western Digital
While price-to-sales ratios may be underutilized, I've found investors can have an unhealthy loyalty to price-to-earnings measures, particularly when it's the only data they consider. Nonetheless, earnings are the point of the whole matter, and Western Digital (NYSE:WDC) has been superb in this department. Western Digital stock is trading at a multiple of 8.7. What's even more amazing is how the hard drive industry's aggregate P/E ratio is only 7.37. Though slightly more expensive than other stocks in the field, Western Digital shares looked healthiest when combining all the significant valuation measures. (Find out more on ratios that help determine the financial strength of a company in the Investment Valuation Ratio Tutorial)

Net Margins - Precision Castparts
Would you rather have a company doing more with less, or less with more? OK, "doing more with more" would be the ideal scenario, but a huge top line is nothing if bottom line profits are minimal. Precision Castparts (NYSE:PCP) has done a great job of making sure sales dollars are actually turned into maximum profits. Over the last twelve months, Precision's net profit margins have averaged out to be 14.11%. That beats the industry's, sector's, and market's net margin average for the same time period. (To learn more about company efficiency, read The Bottom Line On Margins.)

Growth - Air Products & Chemicals
There are two ways to slice this criteria: growth in the top line, and growth in the bottom line. Air Products & Chemicals (NYSE:APD) has aced both. Over the last year, sales have improved by 16.3%, while earnings have increased by 41.3%. That's far better than the specialized gases industry's average figures.

Return on Equity - Kinetic Concepts
Now we come to return on equity - the oft-forgotten yardstick. I find it's somewhat broad (in a good way), though a high ROE may only do an investor good if the company is successfully reinvesting earnings in its own growth. Medical technology company Kinetic Concepts (NYSE:KCI) is one of those companies. Its five-year return-on-equity is 165.8%, which trounces the industry's average of 11.5%.

Let Common Sense Guide You
Obviously a great company doesn't guarantee a great stock, but a company with great performance is much more apt to have that reflected in its stock price. While the arguments for each of the five stocks mentioned above are clear, there's an unseen factor in play as well: can these company's continue to do well going forward? That's where the "common sense" filter is applied. Yes, each of these organizations appears to be positioned for more of the same going forward. If they weren't, this would be nothing but a history lesson.

It's also worth noting all five of these companies were among the leaders in the other four categories they weren't the outright leader in. Simultaneously, these are far from the only five undervalued stocks you can find right now. My only goal was to illustrate how these big bearish moves present as much opportunity as they do pain for investors who keep their cool.

To read more on fundamental valuations, check out Analyze Investments Quickly With Ratios.

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