What does a bargain stock look like to you?
If you ask me, just having a low price to earnings (PE) ratio doesn’t make a stock cheap. Nor does simply having a declining stock price, or trading at a 52 week low make a stock cheap.
All of those numbers matter, but they’re how you measure a value; they’re not the reason value is created. To me, what creates value is when the collective market decides to “write a story” on a stock despite the facts. And despite what the naysayers think, these three stocks truly are as cheap as they look.
Boring is beautiful
I often wonder why Cisco Systems, Inc. (NASDAQ:CSCO)’s stock seems perpetually stuck in neutral. This maker of networking and communication technology has a truly dominant market position, and seems to outperform quarter after quarter.
The first quarter of 2013 was no exception, as Cisco Systems, Inc. (NASDAQ:CSCO) again beat earnings ($0.51 to $0.48) expectations and grew earnings in excess of 10% year over year. Year over year growth, is no small feet for a company of Cisco’s size! In addition to a good quarter Cisco Systems, Inc. (NASDAQ:CSCO) pays a healthy dividend of 3.22%. So why does the stock look so cheap, with a P/E of 12 and a PEG ratio of just 1.27, these days?
My opinion is that Cisco has become International Business Machines Corp. (NYSE:IBM). The “market storyline” is that mature tech companies like Cisco Systems, Inc. (NASDAQ:CSCO) and International Business Machines Corp. (NYSE:IBM) shouldn’t have their growth and cash flows fairly valued. When you’re in tech growth and gobs of cash are a given (says Mr. Market), so unless you’re “unexpected” the market doesn’t care–for now. But that’s where the value lies.
There was a time when Cisco Systems, Inc. (NASDAQ:CSCO) was a new, fast growing, tech company and traded at a multiple that reflected the quality of the business. But once Cisco (and International Business Machines Corp. (NYSE:IBM), etc.) stopped being “sexy,” and once the double-digit growth cooled, the stock lost its premium. Today Cisco, and many names in “old tech,” trade at multiples befitting utility companies.
Sure, Cisco Systems, Inc. (NASDAQ:CSCO)’s days of hyper-growth are long over but it still has a great competitive edge due to the scale of its business and the 18% returns on equity that come with it. When you combine Cisco’s market position, its dividend, and the fact that the earnings are still growing–the stock looks cheap.
iCan’t believe it’s so cheap!
What really makes a stock cheap
Finding cheap stocks really requires us to question authority. We need to question the authority of financial media, analysts, and pundits of all types. The truth is that these people are paid to predict the future, which is impossible, so they usually follow the consensus.
When that consensus is negative news, a good company can see its stock hammered even as the underlying company does well.
Not every stock that has negative headlines will be a value, in fact, most won’t. But when you find stocks like these, with negative headlines and superb growth prospects, you should consider buying.
The truth is, no matter how scary the “story” seems, sooner or later the facts matter.
The article Facts Matter: You Should Consider These 3 Bargain Stocks originally appeared on Fool.com is written by Adem Tahiri.
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