One should never tire of using stock screens or pursuing search efforts in hopes of finding quality ideas. Even when valuations are generally unattractive, potential opportunities can be found. In searching for stocks with a quality earnings yield and attractive return on invested capital, several intriguing opportunities popped up.
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Two Valuable Metrics
A company's earnings yield is the inverse of the P/E ratio. A P/E ratio of 10 implies a earnings yield of 10%. The lower the P/E ratio, the higher the earnings yield, which is desirable. Return on invested capital is also of enormous value. A business that can earn an ROIC consistently above its cost of capital is creating true value. A company can generate greater profits by investing in value destroying projects, but over time those poor capital allocation decisions will erode the value of the business. So searching for businesses with a quality earnings yield and an attractive ROIC provides a very solid list of potential candidates.
Almost Family (NYSE:AFAM) provides home health services, including a range of Medicare-certified home health nursing services to patients in need of recuperative care, typically following a period of hospitalization or care in another type of inpatient facility. The P/E is 9, or an earnings yield of 11%, with an unlevered return on equity of 16%.
Motorcar Parts of America (Nasdaq:MPAA) is a small cap manufacturer and automotive distributor in the U.S. and Canada. The company has a current earnings yield of about 7%, very little net debt and a ROIC in excess of 10%. Its business is performing very strongly, and earnings should continue to remain robust. Motorcar Parts is not a competitor to retail giants like AutoZone (NYSE:AZO), but rather a supplier to the company.
Argan (NYSE:AGX) provides engineering, construction and maintenance services to the energy and telecommunications sectors. The company has a market cap of $142 million and a P/E of 22. However, the company has around $80 million in net cash on the balance sheet, or an enterprise value of $63 million. Shares trade for less than seven-times EV/E. Business can be lumpy at times, as a result of contract timing, but all the excess cash makes the company worth a closer look.
The Bottom Line
Profit growth matched with prudent capital allocation can generate tremendous value for a company over time. Look closer at businesses that meet both of these conditions. (So, you've finally decided to start investing. But what should you put in your portfolio? Find out here. Check out How To Pick A Stock.)
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