Everyone in the stock market needs an investing strategy that grows with each investment. Over the years I have honed my investment strategy to identify investments that fit my personal preference: value investing. I look for stocks with plenty of room to grow that have mistakenly been put on sale.
Right now, three stocks have blipped my radar that I believe present perfect value investing situations.
My strategy looks for companies on sale. Generally, I look for stocks that are down at least 25% from 52-week highs, or in some cases from two year highs. Here are 3 that fit this description:
I want to emphasize that not all stocks on sale are value opportunities. Take Skullcandy Inc (NASDAQ:SKUL) for instance. The company’s stock is down 65% from 52-week highs, and for good reason:
The revenue drop is to be expected since 4th quarter revenue generally spikes. But by only making headphones, Skullcandy Inc (NASDAQ:SKUL) is vulnerable to attack to more diversified players like Zagg Inc (NASDAQ:ZAGG). When Skullcandy lowers prices to compete, its profit margin plummets. Margins are expected to continue to drop going forward. Currently the p/e ratio is about 9 — seemingly an attractive entry point. But a weak profit margin will send earnings the wrong way as reflected by Skullcandy’s forward p/e of 19. Looking at this, it doesn’t seem that this company is a value opportunity. Rather the share price is dropping to reflect a more realistic valuation for the company.
A more attractive option is Cellcom Israel Ltd (NYSE:CEL) — down over 70% from 2 years ago. This nose-dive is attributable to several factors including a more competitive Israeli telecommunication market triggered by new legislation, and a dividend that was eventually cut. Now two years later, Cellcom Israel Ltd (NYSE:CEL) may be an attractive investment once again. The current p/e is about 8, but the forward p/e is just 2. The company right now has very little downside and — with chances of a reinstated dividend looming — looks to have significant upside from here.
Forward earnings has some drawbacks as a metric (as does any metric), but it can show you which way earnings are going. When finding a value opportunity, I generally avoid any stock who’s forward p/e is greater than its current p/e.