About Me 0107: Making Money Ideas

S&P 500 profits are back to pre-crisis levels, but valuations are still low. Does this signal a buying opportunity?

Large American companies are beginning to look healthy again, although this has not been reflected in their stocks’ share prices. The S&P 500 companies are set to increase net income by 19% (13% up in the second quarter), according to Rita Nazareth and Lu Wang of Bloomberg. This is in step with the 6.9% average net income increases that S&P 500 companies have posted over the past 51 years.

Despite these profit improvements, S&P 500 shares appear undervalued by their price-earnings (P/E) ratios, indicating that investors have yet to snap up these well-performing stocks.

The overall S&P 500 index is trading at a P/E of 13.5 (based on projected earnings), which is almost 8% lower than the ratio's 5-year average.

Investors may still be hesitant about investing in stocks given the wobbly global economy. The Euro crisis has yet to be resolved, the debt ceiling is still a pressing issue in the US, China is making a concerted effort to slow down its rapidly expanding economy, employment data has been weak in the US, and the Federal Reserve has ended its bond-buying stimulus program (QE2).

“The fact that valuations have not returned to normal is simply that people are prejudiced against stocks… Earnings growth has been spectacular. People who are buying stocks today are buying an undervalued asset,” David Kelly, of JPMorgan told Bloomberg.

By contrast, Brian Jacobsen of Wells Fargo sees things in a slightly different light.

“Valuations are still at a discount because investors don’t just pay for the next quarter’s earnings…They pay for the whole trajectory of earnings going into the future. Though you can be optimistic about what will be reported for the quarter that just ended, it’s hard to get too excited about growth going forward,” Jacobsen told Bloomberg.

To help you with your own research, we compiled a list of S&P 500 companies undervalued by their P/E-Growth (PEG) ratios (PEG less than 1) that institutional investors have been buying up during the current quarter.

Hedge funds love these undervalued stocks--do you agree? Use this list as a starting point for your own research.

Analyze These Ideas (Tools Will Open In A New Window)

1. Access a thorough description of all companies mentioned
2. Compare analyst ratings for all stocks mentioned below
3. Visualize annual returns for all stocks mentioned

List sorted by net shares bought by institutional investors as a percentage of the share float.

1. BlackRock, Inc. (BLK): Asset Management industry with a market cap of $35.84B. It has a PEG ratio of 0.89. In the current quarter, institutional investors have bought 31.3M shares (net), which represents 26.53% of the 117.97M share float.

2. First Solar, Inc. (FSLR): Semiconductor - Specialized industry with a market cap of $10.94B. It has a PEG ratio of 0.92. In the current quarter, institutional investors have bought 3.0M shares (net), which represents 5.11% of the 58.70M share float.

3. Hewlett-Packard Company (HPQ): Diversified Computer Systems industry with a market cap of $73.2B. It has a PEG ratio of 0.99. In the current quarter, institutional investors have bought 100.8M shares (net), which represents 4.87% of the 2.07B share float.

4. Citigroup, Inc. (C): Money Center Banks industry with a market cap of $116.21B. It has a PEG ratio of 0.87. In the current quarter, institutional investors have bought 139.2M shares (net), which represents 4.78% of the 2.91B share float.

5. Wells Fargo & Company (WFC): Money Center Banks industry with a market cap of $145.93B. It has a PEG ratio of 0.97. In the current quarter, institutional investors have bought 235.6M shares (net), which represents 4.77% of the 4.94B share float.

6. Microsoft Corporation (MSFT): Application Software industry with a market cap of $224.56B. It has a PEG ratio of 1.0. In the current quarter, institutional investors have bought 305.4M shares (net), which represents 4.09% of the 7.46B share float.

7. Staples, Inc. (SPLS): Specialty Retail, Other industry with a market cap of $10.89B. It has a PEG ratio of 0.84. In the current quarter, institutional investors have bought 21.9M shares (net), which represents 3.09% of the 707.97M share float.

8. Nasdaq OMX Group Inc. (NDAQ): Diversified Investments industry with a market cap of $4.26B. It has a PEG ratio of 0.79. In the current quarter, institutional investors have bought 3.1M shares (net), which represents 2.43% of the 127.48M share float.

9. Hartford Financial Services Group Inc. (HIG): Property & Casualty Insurance industry with a market cap of $11.18B. It has a PEG ratio of 0.88. In the current quarter, institutional investors have bought 8.3M shares (net), which represents 2.07% of the 401.04M share float.

10. Harman International Industries Inc. (HAR): Electronic Equipment industry with a market cap of $3.24B. It has a PEG ratio of 0.82. In the current quarter, institutional investors have bought 1.4M shares (net), which represents 2.01% of the 69.68M share float.

(List compiled by Andrew Dominguez)

If you’re looking for investing strategies to help identify undervalued stocks with strong cash holdings, look no further. Your education starts here.

We put together a list of potentially undervalued and fiscally sound stocks by finding names that met all of the following conditions:

- Trailing twelve month (TTM) net profit margin is at least 30% higher than the net profit margin in the previous period. Net profit margin (TTM) is also above 10%.
- Current price is 20% or more below its target price
- Cash and cash equivalents over the recent quarter greater than long-term debt.
- Market cap above $500M

Lastly, we narrowed down our results by identifying the stocks that have experienced significant levels of net institutional buying over the current quarter.

Investing can be complicated, especially when so many accounting terms are being used. If any of the terms above don’t make sense to you, have no fear. Let’s take a look at what each of these metrics mean and why they are important:

Cash and cash equivalents exceeding long-term debt: It is always good for a company to have solid holdings of cash and cash equivalents. Cash is the most liquid asset because it can easily be used to pay off debts, taxes, dividends, etc. in a pinch, while other assets like property and inventory take time and/or effort to convert to cash, a concept known as "illiquidity".

When a company has more cash than debt, risks to stockholders are lessened because these companies are better prepared to carry their debt and more likely to pay out dividends.

Increasing Net Profit Margin: Net profit margin describes how much profit a company keeps for every $1 it generates in revenues. It is calculated as net profits divided by sales and is reported as a percentage. Increased net profit margin is a good thing because it means the company is retaining more earnings and implies that it is in better control of its costs.

Trailing twelve months (TTM): TTM is an indication that the calculated data has come from the last twelve months. For example, if data released in July 2045 is "TTM" (ie, P/E TTM or "Trailing P/E"), this means the price and the earning-per-share data comes from the twelve-month period of August 2044 to July 2045.

Target Price: Analyst target prices can be very useful guides for investors. The target price is a price level set by analysts that, based on their data and estimates, represents their predictions for that company in the upcoming year. Because analysts often have different opinions, we use the average analyst target price. Although target price is upwardly biased, a steep discount from this number can signal that the company has more value to price in (meaning, the stock price may rise).

Institutional Buying: Institutional investors are also known as "big money" investors or managers. They represent big pools of money such as investment banks, pension funds, mutual funds, hedge funds, endowment funds, etc. When they invest in stocks, they can invest hundreds of thousands of dollars or more at one time.

Regular investors pay attention to what institutional investors do because it is easy enough to assume that the big money managers know what they are doing -- or at the very least know more than the average investor. This is why these investors are also sometimes referred to as "smart money.” Note, investors should never blindly trust analysts or institutional investors or anybody else. Use information on institutional investing with other research before making any investing decisions.

Given the data points, do you think these companies will reach their target price? Are institutions making the right moves? Use the list below as a starting-off point for your own analysis. Click on the heat maps to access free, interactive tools to analyze these ideas

Data sorted in alphabetical order.

1. GeoResources, Inc. (GEOI): Independent Oil & Gas industry. Market cap at $607M. Net profit margin (TTM) at 21.61% vs. prior net profit margin (TTM) at 0.17%. Recent price closing at $23.84, compared to target price of $31.86 (implies a potential upside of 33.63%. Cash and equivalents (for recent quarter) at 42.15M vs. long-term debt of $0. Net institutional shares purchased over the current quarter represent 42.74% of the 19.42M share float.

2. HFF, Inc. (HF): Mortgage Investment industry. Market cap at $512M. Net profit margin (TTM) at 12.79% vs. prior net profit margin (TTM) at 0.09%. Recent price closing at $14.23, compared to target price of $18.00 (implies a potential upside of 26.49%. Cash and equivalents (for recent quarter) at 72.34M vs. long-term debt of $209K. Net institutional shares purchased over the current quarter represent 12.28% of the 28.51M share float.

3. Hollysys Automation Technologies Ltd (HOLI): Industrial Electrical Equipment industry. Market cap at $512M. Net profit margin (TTM) at 16.46% vs. prior net profit margin (TTM) at 0.04%. Recent price closing at $9.41, compared to target price of $14.84 (implies a potential upside of 57.68%. Cash and equivalents (for recent quarter) at 102M vs. long-term debt of $33.17M. Net institutional shares purchased over the current quarter represent 10.38% of the 31.78M share float.

4. LogMeIn, Inc. (LOGM): Information Technology Services industry. Market cap at $909M. Net profit margin (TTM) at 17.14% vs. prior net profit margin (TTM) at 0.12%. Recent price closing at $37.78, compared to target price of $50.43 (implies a potential upside of 33.48%. Cash and equivalents (for recent quarter) at 176M vs. long-term debt of $0. Net institutional shares purchased over the current quarter represent 9.81% of the 20.38M share float.

5. Mercury Computer Systems Inc. (MRCY): Computer Peripherals industry. Market cap at $573M. Net profit margin (TTM) at 13.96% vs. prior net profit margin (TTM) at 0.07%. Recent price closing at $18.99, compared to target price of $25.00 (implies a potential upside of 31.65%. Cash and equivalents (for recent quarter) at 156M vs. long-term debt of $86K. Net institutional shares purchased over the current quarter represent 20.56% of the 27.73M share float.

6. Optimer Pharmaceuticals, Inc. (OPTR): Biotechnology industry. Market cap at $553M. Net profit margin (TTM) at 14.19% vs. prior net profit margin (TTM) at -40.69%. Recent price closing at $11.94, compared to target price of $18.67 (implies a potential upside of 56.34%. Cash and equivalents (for recent quarter) at 180M vs. long-term debt of $0. Net institutional shares purchased over the current quarter represent 12.37% of the 42.04M share float.

7. TransGlobe Energy Corporation (USA) (TGA): Independent Oil & Gas industry. Market cap at $911M. Net profit margin (TTM) at 17.98% vs. prior net profit margin (TTM) at 0.08%. Recent price closing at $12.41, compared to target price of $16.77 (implies a potential upside of 35.12%. Cash and equivalents (for recent quarter) at 8.63M vs. long-term debt of $56.73M. Net institutional shares purchased over the current quarter represent 14.71% of the 69.33M share float.

(List compiled by Becca Lipman)

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About Me 0107

Wednesday, August 3, 2011

Making Money Ideas

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