This Top Stock Is a Winner

Valuation is an imperfect science, but it's as important a concept to fantasy football players as it is to investors. I should know; Eagles tight end Brent Celek was a waiver-wire pickup for me at the beginning of the season. His four catches for 61 yards and a touchdown against the Giants on Sunday helped deliver my fantasy team a victory.

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 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, last winter, Amazon.com (Nasdaq: AMZN  ) was trading as if its cloud computing business were worth next to nothing. They've more than doubled their money since.

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 Celek. Here's what 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 whom 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 58 candidates that could be worthy of filling roster spots in your portfolio. I've decided to highlight the six below:

Company

52-Week Price Change

P/E Ratio

ROE

Cubist Pharmaceuticals (Nasdaq: CBST  )

(33.4%)

6.1

41%

Amgen (Nasdaq: AMGN  )

(11.5%)

11.6

21.7%

OSI Pharmaceuticals (Nasdaq: OSIP  )

(20.3%)

5.1

15.6%

American Oriental Bioengineering (NYSE: AOB  )

(34%)

6.7

12.4%

China Security & Surveillance (NYSE: CSR  )

(36%)

6.9

10.7%

Nash-Finch Company (Nasdaq: NAFC  )

(27.8%)

9.9

10.3%

Source: Motley Fool CAPS screen data.

Of these, I'd pick up China Security & Surveillance, a supplier of -- surprise! -- security and surveillance equipment throughout mainland China. Third-quarter earnings and revenue missed estimates, yes, but the stock trades for less than five times next year's projected earnings.

I'll understand if "projected" makes you queasy; it should. Projections are rarely reliable. But I like the evidence here of improving cash flow at China Security & Surveillance, thanks in part to big new deals.

"With restructured debt, upcoming large E-City projects and GAAP-only reporting, [China Security & Surveillance] has probably turned into solid company while still maintaining its growth and strong fundamentals," wrote CAPS All-Star sisula last month. "Market just can't ignore this company forever. The price doesn't reflect the prospects."

And I'm adding China Security & Surveillance to my CAPS portfolio. But that's just my take. What do you think? Would you give this stock a spot on your portfolio roster? Let us know by signing up for CAPS today. It's 100% free to participate.

American Oriental Bioengineering is a Motley Fool Hidden Gems pick and a former Global Gains recommendation. Amazon is a Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers' fantasy team is now 4-4 on the season with five games to play. He's not sweating yet. Tim is also a member of the market-beating Rule Breakers team and 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.


Read/Post Comments (4) | Recommend This Article (18)

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 November 05, 2009, at 4:22 PM, noryakerson wrote:

    I just couldn't keep AOB any longer. I sold real shares at a loss because in the end I just didn't trust the company's management. I realize now that shady dealings and lack of transparency are almost immediate deal breakers for me. I just don't have the stomach to deal with this crap when there are so many great forthright companies out there.

  • Report this Comment On November 06, 2009, at 12:34 PM, bzw51 wrote:

    I'm on the verge of selling the loooser AOB, but I'm down so far, that I still have a glimmer of hope that I at Least make my money back, it would have to raise 50% for my break even point.

  • Report this Comment On November 08, 2009, at 4:51 PM, fishmon wrote:

    Gosh, after these two posting I may back away because I was ready to start to play with AOB. I believe further valuation on my part is necessary but it currently seems to be a buy at this price. If I buy today and bzw51 gets to his break even point I am ahead 50%. Who out there believes that is going to happen in the short run? This stock has floundered around $4 dollars for as long as I have been watching it.

  • Report this Comment On November 09, 2009, at 7:44 PM, Fool wrote:

    No kidding or lying, I made a fortune on Nash-Finch through the years! There are just under thirteen million shares oustanding, and most are held by institutions. When it starts to "fly", watch out! Buy before this Thursday's earnings report. Today is Monday the ninth of November, 2009

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