This Top Stock Is a Winner

Valuation may be an imperfect science, but it's as important to fantasy football players as it is to investors. I should know; I benched one of my best waiver-wire pick-ups, Minnesota wide receiver Sidney Rice, and lost. Rice was superb in Sunday's 33-31 shootout victory over Baltimore, catching six balls for 176 yards.

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, and market-beating investors buy oversold stocks for $0.50 on the dollar.

Waiver-wire heroes, unloved stocks ready to rise
These bargain hunters knew that Green Mountain Coffee Roasters (Nasdaq: GMCR  ) would continue to reach higher highs, thanks to its K-cup home brewing system. Starbucks (Nasdaq: SBUX  ) now seeks to copy that strategy with its new Via instant coffee. And investors who bet on Green Mountain last fall? They've been handsomely 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 underrated heroes like Rice. 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 10% or worse haircut in price over the past year, because we're bargain hunters. (This is a change to account for the market's massive run-up in the wake of the Wall Street Panic of 2008.)

Today's screen returned 37 candidates that could be worthy of filling roster spots in your portfolio. These six possess a track record of superior returns on shareholder equity:

Company

52-Week Price Change

P/E Ratio

ROE

Questcor Pharmaceuticals (Nasdaq: QCOR  )

(31.5%)

8.4

55.7%

Hugoton Royalty Trust (NYSE: HGT  )

(16.8%)

10.1

49.1%

Bank of the Ozarks (Nasdaq: OZRK  )

(15.3%)

11.1

14.4%

Aetna (NYSE: AET  )

(10.4%)

9.3

14.2%

HealthSpring

(15.2%)

6.5

13.6%

Huron Consulting Group (Nasdaq: HURN  )

(48.1%)

11.7

11.3%

Source: Motley Fool CAPS screen data.

Of these, I'd pick up Hugoton Royalty Trust, a big dividend payer (yielding 6.2% as of this writing) that profits from natural gas drilling, but isn't a driller itself.

Confused? Hugoton was formed in 1998, when XTO Energy conveyed its 80% net profits interests in gas-producing properties in the Midwest to the trust. Expenses consist of paperwork and not much more, leading to a -- get this -- 99% net margin.

"Great fundamentals, governance, and accounting risk is fantastic (only 3% of companies have less risk), and more drilling occurring as we speak," wrote CAPS investor shybiske in June. "I say get in now and let it ride, because catching up to it when it starts to run will be hard."

What do you think? Would you give Hugoton Royalty Trust a spot on your portfolio roster? Let us know by signing up for CAPS today. It's 100% free to participate.

Green Mountain Coffee Roasters is a Rule Breakers recommendation. The Fool owns shares of Starbucks, which is a Stock Advisor selection. 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. It's 100% natural, fresh-baked disclosure-y goodness.


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  • Report this Comment On October 23, 2009, at 9:44 AM, Usnzth wrote:

    I did, and am loving the steady climb and steady monthly dividends.

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