In times like this when it seems like stock prices have run away, going back to the old stock screen for ideas is a worthwhile exercise. I screened for companies with three characteristics: a market cap of less than $1 billion, a P/E of 15 or less, and profit growth. There were more than a handful of names that appeared on the list. Although this screen's parameters are very simplistic in nature, they are a solid combination to have.
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While an attractive P/E ratio can sometimes be a misleading value indicator, it's a good starting point. Earnings can be "massaged" in order to meet or beat estimates so always rely on the P/E with this degree of skepticism in mind. However, the vast majority of corporations are not fudging earnings figures. One can quickly refer to the balance sheet to "verify" earnings. If receivables are growing fast, that could mean companies are extending generous credit terms in order to boost sales, which helps inflate profits. That tactic easily shows up on the cash flow statement as well: cash flow from operations will be decreased by the amount of increase in receivables.
1. Almost Family (Nasdaq:AFAM)
This company provides home health services like visiting nurses and personal care attendants. The market cap is $228 million and shares trade for less than 9 times earnings. The company has no net debt. Over the past three years, profits have steadily increased.
2. Motorcar Parts of America (Nasdaq:MPAA)
This is a rapidly growing distributor and remanufacturer of various automotive parts. Profits have grown from $0.32 cents per share to $0.99 per share in the past three years. Forward P/E is about 5.7.
SEE: The P/E Ratio: A Good Market-Timing Indicator
3. Providence Service Corporation (Nasdaq:PRSC)
PRSC provides government sponsored social and counseling services. After a year of losses, the company has been squarely in the black over the past two years. The company has a market cap just below $183 million and trades for about 11 times earnings. However, it's always a concern today when a company derives its revenues from a government sponsored need. There's always the risk of significant revenue volatility.
4. United Fire and Casualty (Nasdaq:UFCS)
This company is a $450 million property and casualty insurance company based in Iowa. Shares trade for 18 times earnings and at a 40% discount to book value. Shares also yield a quality 3.5%.
SEE: Intro To Insurance: Property And Casualty Insurance
Simply applying the above three search filters produces more ideas than one might think in today's market. Many won't pass the test but having ideas to choose from is not a bad problem to have. Unfortunately, there is no easy way to find quality investment opportunities. You have to do it the old fashioned way: by continuously looking at companies trying to find attributes that strike at you. (For more, see The Value Investor's Handbook.)
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