Bobbing for Bargains

Happy Halloween! If you survive tonight, you might spend time this weekend pondering what stocks are bobbing in the bargain bin after a nasty October. Can’t think of a better holiday to end the month than one centered on fear.

There are many ways to define bargains in the stock market. The traditional valuation ratios are the best starting point: price/earnings, price/earnings/growth, price/sales, price/book and so on are part of almost every screening program.

Sometimes, I like more human involvement. What do analysts think a company is worth, and which ones are currently trading farthest below that price? Morningstar feeds and cares for a team of solid analysts, and the firm’s premium screener enables me to run a simple search:

  • Show me all 5-star stocks
  • Show me which ones are currently trading at X of the analyst’s fair value estimate

This morning, I ran the screen with a simple .50 as the multiplier, showing me all stocks that are trading at half the firm’s fair value estimate — or lower. I then sorted the 253 by various measures. Below are three stand-outs.

Lear (LEA $2) is one of the leading auto-parts suppliers in the world. The company makes seats and electrical products and has more than 90,000 employees in 35 countries. No surprise that it’s been devastated by the auto industry collapse. Morningstar says: “Skyrocketing oil prices, declining sales from Detroit automakers, and lowball pricing from distressed competitors destroyed Lear’s profits the past few years. Today, Lear is largely a seating and electrical company that we think is well positioned to hold the line despite the weak environment for auto sales.” Fair Value Estimate: $19. Consider Buying: $7.60. Consider selling: $47.50. Gain from current price to fair value: 850%. Gain from current price to sell price: 2,275%.

Rio Tinto (RTP $184) is a top-tier global miner along with BHP Billiton (BHP) and Anglo American (AAUK). A mega-merger proposal from larger rival BHP effectively sees Rio in play. A world-class asset base and capable management make Rio one of the few miners to earn more than its cost of capital through the commodity cycle. Geographic and product diversification give Rio relatively stable cash flows and lower operating risk than many of its mining peers. Morningstar says: “Through selective acquisitions and grassroots exploration, Rio has assembled a large portfolio of long-lived, low-cost assets. Operations include world-class hubs in aluminum, coal, copper, diamonds, gold, iron ore, industrial minerals, and uranium. This competitive resource base sets Rio apart from the rest of the pack and supports returns above average for both the resource industry generally and its more select diversified mining peers.” Fair Value Estimate: $604. Consider Buying: $423. Consider selling: $846. Gain from current price to fair value: 228%. Gain from current price to sell price: 360%.

Seagate Technology (STX $6.41) is the leading hard disk drive manufacturer (HDD) in the world. The company manufactures hard drives for computers and other electronics, and it holds one third market share of the $35 billion HDD industry. Morningstar says: “Seagate is positioned to be the market leader of the hard drive industry for years to come. Demand for hard drives continues to increase. Individuals are finding the need for more storage space because of the increased amount of digital content (such as movies, music, and pictures) now common in personal computing. Furthermore, companies need to store and archive increasing amounts of data in the course of business. We believe these trends will persist and fuel hard drive demand for years to come. As the industry leader, we expect Seagate to be the primary beneficiary of this growth.” Fair Value Estimate: $17. Consider Buying: $8.50. Consider selling: $34. Gain from current price to fair value: 165%. Gain from current price to sell price: 430%.

There are lots more where these came from, with all kinds of bargains scattered around the market. If you’re not sure about individual stocks, consider one of the major indexes. They’re all down but they’ll all one day rise to life again — just like Frankenstein’s monster.

Have a happy Halloween!

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