This Top Stock Is a Winner

Valuation is an imperfect science, but it's as important to fantasy football players as it is to investors. I should know; the guy who picked up the Colts' Pierre Garcon torched me last week. Garcon proved to be one of quarterback Peyton Manning's emerging targets, catching three balls for 64 yards and a score.

Value is value, whether you're assembling a fantasy team or a stock portfolio. But don't take my word for it. "Before you make any decision -- who to draft, trade, start, and sit -- make sure you are following that basic principle; how risky is this move, does it give me the best chance to win?" writes ESPN fantasy analyst Matthew Berry in his annual manifesto.

See the parallels here? Winning fantasy players pick up unloved players for less than market value, while market-beating investors buy oversold stocks for $0.50 on the dollar.

Waiver-wire heroes, unloved stocks ready to rise
These investors knew that SXC Health Solutions (Nasdaq: SXCI  ) could profit from Obamacare. Their ranks include my Motley Fool Rule Breakers colleague Karl Thiel, who singled out SXC in our April issue, and has since been rewarded.

More bargains are out there. For this weekly column, let's use the Motley Fool CAPS screener to find the stock market's version of waiver-wire heroes like Garcon. We're looking for:

  • A minimum $250 million market cap, because we don't draft unsigned free agents.
  • A price-to-earnings (P/E) ratio of less than 12, because we're not interested in players that everyone else loves.
  • A 10% or better return on equity (ROE), because we want proof that this stock can play at the level we need it to.
  • A 20% or worse haircut in price over the past year, because we're bargain hunters.

Today's screen returned 82 candidates that could be worthy of filling roster spots in your portfolio. These six boast superior returns on shareholder equity:

Company

52-Week Price Change

P/E Ratio

ROE

Diana Shipping (NYSE: DSX  )

(31.9%)

4.3

28.6%

Kroger (NYSE: KR  )

(23.1%)

10.7

22.3%

Matrix Service (Nasdaq: MTRX  )

(25.3%)

9.0

18.0%

Penn West Energy Trust (NYSE: PWE  )

(28.7%)

4.8

17.3%

GigaMedia (Nasdaq: GIGM  )

(27.7%)

8.0

16.8%

Cardinal Health (NYSE: CAH  )

(47.1%)

8.3

13.2%

Source: Motley Fool CAPS screen data.

Of these, I'd pick up Penn West Energy Trust for the reasons CAPS All-Star Chemdawg offered in August:

What a ridiculous yield ... Just the dividend pretty much guarantees that you will outperform the market even without much in the way of actual price appreciation. Even from a value standpoint, however, you could argue that there is still plenty of upside on the stock price at these levels also.

There are no guarantees in investing, but Chemdawg has a point: Penn West’s 10.6% dividend yield is pretty sweet. The world's best investors have long used dividends to crush the market, and Penn West's pumped-up payout looks sustainable. The company has paid regular monthly cash distributions since June 2005.

But that's also just my take. What do you think? Would you give Penn West a spot on your portfolio roster? Let us know by signing up for CAPS today. It's 100% free to participate.

More bargain-basement Foolishness:

GigaMedia and SXC Health Solutions are Rule Breakers recommendations. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers has yet to be named a friend of ESPN's Fantasy Focus podcast. One day, perhaps. Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Check out his portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy is no fantasy.


Read/Post Comments (4) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2009, at 1:12 PM, bojabenson wrote:

    In 2008 I gradually owned 1000 shares of Penn West. At the peak, the price got into the 30's, but this FOOL did not sell, but it was kicking out the 10% dividend every month which produced 100 more shares. In 2009 I sold, but now I am buying PWE again. Will it get back to the 30's again?

  • Report this Comment On October 02, 2009, at 1:17 PM, bobbyabull wrote:

    Nice article. I too play fantasy football and trade in the market. Garcon went in waivers this week to one of my opponents (I selected Nate Burleson of Seattle, since I have Roddy White and DeSean Jackson on bye's) but was keenly aware of the speedy Indy wideout. I also presently own 300 shares of Gigamedia at a cost basis of $4.98. Assuming .65 cents a share earnings for 2010 (Yahoo Finance) a P/E of 12.25 will bring the share price to $8 - a double if we ever dare dip down to $4. As of today (10/2) the price is $4.68, so the risk/reward is definitely intriguing here. The company, by the way, is essentially an on-line casino, so their business model is both understandable and (to some) addictive!

    I hope we're both right. I look forward to more of your advice in the future...

  • Report this Comment On October 06, 2009, at 9:07 AM, kindermorgan wrote:

    PWE management is currently talking of debt pay down and switching over to a corporate structure. They have committed to the current dividend through Oct or November after which they intend to revisit the payout. The current account balance due to low commodity prices for natural gas indicates a negative cash flow. How can they sustain current dividends? Just curious. Am IO not seeing what you are seeing?

  • Report this Comment On October 08, 2009, at 6:33 AM, Knifecatcher1 wrote:

    'kindermorgan' brings up crucial points re: PWE Penn West Energy Trust. Bottom line is to be wary of these QVC-style motley fool adverts that seem to uncover a stock that offers everything and sells for nothing. Like buying a case of Sham-Wows ... if you fall for all the hype you'll be disappointed - and poorer.

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