It is important when investing your money in stocks that you not only purchase great performing companies, but more importantly that you buy them at a great price. Regardless of what valuation metrics you prefer, I think it is important that you try and consider all aspects of a company’s performance. To just analyze the price-to-earnings (P/E) or price-to-book values (P/B) would be naïve. Just because a company trades at low multiples does not mean it is a great value play. We need to be looking for great companies that trade at discounted prices. For one reason or another, the market has either yet to recognize or has passed over these value companies, and we as informed investors get to reap the benefits.
Value in Semiconductors
Brooks Automation, Inc. (USA) (NASDAQ:BRKS) provides automation, vacuum, and instrumentation solutions for semiconductor manufacturing, life sciences and technology device manufacturing markets worldwide. The company has no debt and currently trades at 5.9 times trailing twelve months’ earnings. Brooks Automation, Inc. (USA) (NASDAQ:BRKS) also trades at 0.96 times price/book and 1.23 times price/sales. Earnings are expected to grow at close to 18% per year for the next five years. Brooks Automation has a forward dividend yield of 3.18% with a very manageable 17% payout ratio. Brooks Automation, Inc. (USA) (NASDAQ:BRKS) combines a hefty dividend and strong earnings growth, all the while trading below book value.
Value in Regional Banks
Umpqua Holdings Corp (NASDAQ:UMPQ) operates as the holding company for Umpqua Bank and Umpqua Investments, Inc. that provide commercial, and retail banking and brokerage services to corporate, institutional, and individual customers in the United States.
Value in Cloud Computing
8×8, Inc. (NASDAQ:EGHT) develops and markets telecommunications services for internet protocol (IP), telephony, and video applications. It also offers contact center, Web-based conferencing and unified communication services, as well as cloud-based computing services.
8×8, Inc. (NASDAQ:EGHT) has no debt and currently trades at just 7.37 times trailing twelve month’s earnings. The company also has a profit margin over 70% and a return-on-equity of over 80%. The best part of 8×8 is the discount you are paying for what is really a growth company. As large and small businesses alike look to cut costs, 8×8, Inc. (NASDAQ:EGHT) will be set up perfectly to capitalize. Although it has some large competitors (think Verizon, AT&T, etc.), I still believe their torrid growth will continue.
Wrap Up
The process of determining if a company is undervalued is not easy. It is important to not only emphasize traditional valuation metrics, but to include all aspects of a business’s operation. You should be looking for companies that have low debt-to-equity (two out of the three have no debt and the other has a debt/equity less than .50), low price/earnings multiples, and trade at or below book value. The cherry on top is growth. If you can identify companies that meet our value requirements that also have sustainable growth potential, you are golden.
One caveat to remember when investing in small cap value companies is that they tend to more volatile than the broader market. Remember that you should be buying these companies with a long term outlook. You also should be reevaluating all the companies in your portfolio regularly to ensure that the basis behind why you bought them in the first place still holds true.
The article 3 Undervalued Companies That Deserve Your Attention (Part 2) originally appeared on Fool.com and is written by Daniel Paterson.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
