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. Consider the fortunate owners who took a flier on Beanie Wells in this year's draft. The Arizona Cardinals' rookie running back rushed 16 times for 85 yards and two scores. He also caught two passes for 32 yards in Arizona's 31-20 victory over the Seattle Seahawks.

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 are the bargain hunters who knew that, even in the midst of the worst financial crisis in 50 years, American Express (NYSE: AXP  ) would persist. 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 Wells. 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 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 5% 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 2008.)

Today's screen returned 23 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

FirstEnergy (NYSE: FE  )

(24.9%)

11.8

12.1%

Ralcorp Holdings

(7.6%)

10.6

11%

Kroger (NYSE: KR  )

(12%)

11.8

22.3%

National Interstate

(8.2%)

9.8

13%

Psychiatric Solutions (Nasdaq: PSYS  )

(18.6%)

10.5

11.5%

Spartan Stores (Nasdaq: SPTN  )

(36.3%)

8.8

13.3%

Source: Motley Fool CAPS screen data.

Of these, I'd pick up FirstEnergy, a diversified utility operating principally out of Akron, Ohio. I like the stock for two reasons:

  1. Despite having a higher gross margin than both the industry average and peers such as Dominion Resources (NYSE: D  ) and Allegheny Energy (NYSE: AYE  ) , the stock trades for a below-average P/E.
  2. With a 61% payout ratio, First Energy's 5.2% dividend yield looks affordable. Also, FirstEnergy has been consistently raising dividends over the last four years.

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

American Express is an Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers' fantasy team is now 5-5 on the season with three games to play. He's officially sweating. 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 (0) | Recommend This Article (6)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1047016, ~/Articles/ArticleHandler.aspx, 10/21/2014 3:02:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement