This Stock Is Too Cheap

The stock market has had an incredible run, rising 65% from its March 2009 lows. But while the S&P’s surge has been sensational, there are still cheap stocks out there -- if you know where to look.  I asked three of our Foolish analysts to highlight one stock they think is trading too darn cheap:

Jeff Fischer, advisor, Motley Fool Pro and Motley Fool Options
AmTrust Financial Services (Nasdaq: AFSI  ) is a little-known insurance provider working in predictable, underserved niche markets where it holds competitive advantages. Focused on workers compensation insurance for really small businesses that are less likely to lay off employees, the company enjoys greater than 80% policy renewal rates, collecting healthy premiums year after year. In addition, AmTrust also offers extended warranty protection on consumer products, as well as property and casualty insurance.

With most of its investment portfolio planted in A-rated bonds, AmTrust sidestepped the financial meltdown of 2008 and remains on solid footing. Direct premiums earned rose from $148 million in 2004 to more than $1 billion in 2009, and they’re still growing, while the company has one of the strongest combined ratios in the industry and consistently earns a return on equity of above 20%. At current prices, the stock fetches a modest 1.3 times book value, seven times earnings, and yields 1.9%. With tangible book value up 13% in 2009 and 14% over the past 12 months, the stock should continue to appreciate as book value grows, while offering lower-than-average risk.  

Bryan Hinmon, analyst, Motley Fool Pro
Microsoft (Nasdaq: MSFT  ) is just getting too cheap to ignore. The company has grown revenue by 9% and earnings by 13% for each of the past five years and has generated enough free cash flow to make Bill Gates blush. And even though Microsoft is “cool to hate,” it is incredibly shareholder-friendly, having returned $100 billion to shareholders over the past five years via dividends and share repurchases.

I also like that Microsoft is attacking the cloud computing threat head-on with its Azure platform. The company’s response to its cloud computing competition has been atypically aggressive -- just take a look at its in-your-face website whymicrosoft.com, where Mr. Softy takes a direct whack at a certain Internet juggernaut. Package up the saucy new Microsoft with a bow and a 7.5 times enterprise value to EBITDA price tag and you can see why it was the first stock selected for the Fool DRIP Portfolio.

Jason Moser, analyst, Motley Fool Inside Value
While the market has had a nice run over the past year and a half, Fidelity National Financial (NYSE: FNF  ) seems to have missed the boat a bit. I understand why, though. I mean, we are talking about a title insurer here. As in housing. As in the housing market is still getting killed and it doesn’t look like it is going to be getting much better real soon.

But as a title insurer, Fidelity makes its money when houses change hands. Title insurance protects buyers (and lenders) from any potential outstanding claims on the property, and it is a necessary cost of doing business. With the housing market still in shambles, Fidelity’s volume is down. But no worries, these things move in cycles, and as inventory starts moving again Fidelity will see an uptick in business. After all, together with First American Financial (NYSE: FAF  ) -- the industry’s second-largest player, and another company that should benefit from a housing resurgence -- Fidelity controls 70% of the title insurance market. As a bonus, Fidelity’s $3 billion investment portfolio should benefit from the eventual increase in interest rates.

The Foolish conclusion
You’ve heard what our Foolish analysts have to say -- now we want to know what you think! Are any of the companies mentioned in this article cheap enough to make their way into your portfolio? Or do you have a cheaper stock to suggest? Let us know in the comments box below!

Jeff Fischer owns shares of AmTrust. First American Financial, Fidelity National Financial, and Microsoft are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of AmTrust Financial Services. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (24)

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 August 05, 2010, at 4:04 PM, CPACAPitalist wrote:

    MFST FTW!

  • Report this Comment On August 05, 2010, at 4:04 PM, CPACAPitalist wrote:

    *MSFT FTW LOL...

  • Report this Comment On August 05, 2010, at 4:08 PM, ibitegirls wrote:

    Buying Microsoft is like buying cash. Its not going to move and has not moved for the past decade. Where is the growth? I personally think Microsoft is out of touch with consumers. Just look at Vista and what a failure that was lmao.

  • Report this Comment On August 05, 2010, at 4:09 PM, blakec868 wrote:

    How about BSX?

  • Report this Comment On August 05, 2010, at 4:44 PM, bighairydogcat wrote:

    I agree msft is a good vehicle to park cash for safety, I really dont see too much of an upside for them with all the targets on their back. They seem to be playing catch up most of the time with new technology and seemed to missed the boat completely with mobile devices. No doubt they will continue to hold their own, I believe they need to wow the world again and show us what they are all about. Consolidate efforts and attack rather than open the kitchen drawer and throw every knife in all directions.

  • Report this Comment On August 05, 2010, at 6:33 PM, ChuckWoolery wrote:

    too many people and businesses still rely on microsoft windows. can't count them out in the near term.

  • Report this Comment On August 05, 2010, at 6:35 PM, TheDumbMoney wrote:

    'ibitegirls,' be careful not to mistake share price appreciation growth for actual growth. Take a look at MSFT's free cash flow ten years ago, and now. Take a look at all kinds of other comparative metrics. MSFT was priced to be god ten years ago. Unlike a JNPR, it did not crash, because there was more reality behind its green curtain. But anyone who thought, ten years ago, that it was going to go up-up-up, was simply out of his or her mind. Just so now the pendulam has swung, after ten years of growing into its valuation, and beyond it. Did it miss some opportunities? Sure, many. Did its growth legitimately and permanently slow? Sure. But too many people are looking at that ten year chart on MSFT, and on other stocks like WMT, and concluding, in my view, exactly the opposite of what they should be concluding. In that sense, MSFT and WMT are high quality proxies for the S&P 500 as a whole. The problem is not that the world is awful now, though it is. The problem is that the world ten years ago was insanely over-optimistic, and over-valuing these companies. To blame MSFT for that is like blaming a four-year-old because she can't in fact speak the five languages her wild-eyed, over-processed mother assures you she can speak.

  • Report this Comment On August 05, 2010, at 7:57 PM, lctycoon wrote:

    I had a look at MSFT's numbers and reached the same conclusions that dumberthanafool did. The company has had virtually no share growth in the last decade, true. But then, neither did the S&P as a whole. MSFT has a pretty hefty dividend, especially for a tech stock, so you would have beat the market had you held it for the past ten years and reinvested that dividend.

    Buying Microsoft isn't really like buying cash... it's like buying a printing press. Their FCF growth proves that.

  • Report this Comment On August 05, 2010, at 11:47 PM, energysystems wrote:

    I gotta concur with Ictycoon and dumberthanafool. I put Intel and MSFT in the same box, an industry leader that provides a solid dividend that'll continue to increase over time. When they get cheap, I buy them. It is a printing press, a cash making machine. 3%+ dividend that'll keep up rain or shine.

  • Report this Comment On August 06, 2010, at 8:22 AM, Melaschasm wrote:

    If you buy MSFT now, you are not going to have a ten bagger in five years. However, you are going to get a nice dividend, along with a stock price that should follow the S&P 500.

    While it is nice to have a few stocks with amazing potential, it is also important to have some solid core stocks with a high percentage chance of beating the market.

  • Report this Comment On August 06, 2010, at 9:10 AM, TMF42 wrote:

    Hey all - great thread.

    Don't forget the importance of investing in a company that has the capacity to invest in growth areas and survive in the long-run. Micosoft's rock-solid balance sheet and (as alluded to above) cash "printing press" qualities give it the juice it needs to stay around and play.

    Remember, a big part of winning in the investing game is not losing, and the downside of MSFT pales in comparison to its upside.

    The AAA rating, shareholder friendly management, smart people and sticky revenue help me sleep at night. All the while, I know they are experimenting in growth areas.

    Bryan

    TMF42

  • Report this Comment On August 07, 2010, at 3:10 PM, 11x wrote:

    Has anyone noticed that the CEO of AFSI is 38 years old, has been the CEO of AFSI since 2008, they year after he graduated college with his MBA?

  • Report this Comment On November 10, 2010, at 10:36 AM, stueynet wrote:

    Cannot really say I agree with this. So many better companies. Steve Said it well here: http://bulwatechreport.com/2010/11/09/why-would-any-investor...

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