4 Stocks For An Overheated Market

By Will Ashworth | October 15, 2009 AAA

The S&P 500's current trailing 12-month price-to-earnings ratio is 20.13, 101% higher than it was back in March when the markets hit bottom. In a little over seven months, the average S&P 500 stock has doubled in value. The question we should all be asking ourselves is whether earnings will follow along in the next seven months to maintain these inflated P/E ratios. While I can't answer that question, I can recommend four stocks currently trading below their sectors' trailing 12-month ratios.
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4 Cool Stocks

Sector TTM P/E
Consumer Discretionary 17.46
Health Care 12.13
Utilities 12.10
Telecom 11.86
S&P 500 20.13

Consumer Discretionary Micro Cap: Saga Communications (NYSE:SGA)
It really doesn't matter what size of broadcasting company Saga Communications is, all industry players have experienced serious revenue reductions over the past two years. While Saga is no CBS (NYSE:CBS), it's holding its own in the 26 markets where it operates radio and/or television stations. Despite losing $68.6 million over the last 12-months, it's managed to generate $10.2 million in free cash flow; in the second quarter, it actually grew by $70,000 to $5.96 million year-over-year. Most importantly, when advertising recovers sometime in 2010, its stock has a long way to go to retest its all-time high of $90 in June 2002. Top it off with Daniel Tisch (son of Larry Tisch) owning 11.4% of the company and I think you can ride this for some time.

Health Care Small Cap: Amedisys (Nasdaq:AMED)
While many industries are still suffering as the recession comes to an apparent end, one that hasn't missed a beat is home healthcare, which continues to create jobs while others are still cutting. In September, the industry created 4,400 new jobs across the country while the national unemployment rate sits around 9.8%. With an aging population wanting to continue to live in their homes, it's likely that once the economy improves, hiring should accelerate as more Americans seek help. Founded in 1982, Amedisys now has 549 locations in 38 states and is the nation's leading provider of home health services. In 2009, it expects revenues to be $1.5 billion, generated from 8.4 million patient visits. That's just under $180 per visit. It's expected that home healthcare revenues will reach $47.9 billion by 2019, suggesting that the Baton Rouge company still has plenty of room to grow. Most of the increase will come from tuck-in acquisitions of single-site local or regional providers. Financially, this stock is rock-solid, with earnings per share growth of 20% or more in each of the last six years. In terms of free cash flow, it's currently yielding 15.3%. Anything currently above 10% is excellent.

Utilities Mid Cap: Telus (NYSE:TU)
Telus is Canada's second-largest telecommunications company next to BCE (NYSE:BCE). In the world of telecoms, a useful measure for analysts is the average margin per user (AMPU), which takes EBITDA for a period divided by the number of customers a company had during the period. In the second quarter, Telus' EBITDA dropped 4.9% to $751 million. In terms of AMPU, it dropped by 19.2% from $79.05 per subscriber in Q2 2008 to $63.86 in 2009. However, much of the decline is due to the exchange. Excluding currencies, the quarterly AMPU dropped a more palatable 7.7%. In terms of free cash flow, its yield is currently 9%, which is good, if not great. Although competition in the wireless sector in Canada is heating up, I'd be very surprised if Rogers (NYSE:RCI), BCE and Telus aren't still the big three five years from now.

Telecom Large Cap: Verizon (NYSE:VZ)
This last one was a limited choice between Verizon and AT&T, the two behemoths of the telecom business. I'll go with Verizon for two reasons: First, its free cash flow yield is better than AT&T's. Second, the product of its P/E, P/B, P/S and PEG ratios is significantly lower than AT&T. Add in a dividend yield that is equal to AT&T's and it's a hard one to pass up.

Bottom Line
None of these stocks really gets my heart racing and that's a good thing. Each of them is still very attractive despite the rapid rise of the markets in the past six months. (For more, check out Sector Rotation: The Essentials.)

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