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 enterprising owners who picked up Dallas wideout Miles Austin in midseason. He's caught passes for touchdowns in each of the last three games, including last week's seven-catch, 139-yard performance in a 24-17 win over New Orleans.

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 shares of Starbucks (Nasdaq: SBUX  ) were trading at the point of maximum pessimism at this time last year, and that any good news could brew up serious returns. They've enjoyed a multibagger 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 Austin. 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.
  • Returns of no better than 5% 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 10 candidates that could be worthy of filling roster spots in your portfolio. These three possess a track record of superior returns on shareholder equity:

Company

52-Week Price Change

P/E Ratio

ROE

Medidata Solutions (Nasdaq: MDSO  )

(10.4%)*

8.8

18%

Chubb (NYSE: CB  )

0.7%

9.1

12.2%

Torchmark (NYSE: TMK  )

3.5%

8.5

12.9%

Source: Motley Fool CAPS screen data.
*Medidata began trading on June 25, 2009.

Of these, I'd pick up Medidata Solutions for its position in monitoring and optimizing the clinical trial process for developing new medicines.

I'll concede the danger of investing in any health-care stock right now. A comprehensive health bill has just passed through the Senate, which now goes back to the House for conference. We don't know exactly what the downstream effects will be if this legislation becomes law.

Certainly, big insurers such as Aetna (NYSE: AET  ) and WellPoint (NYSE: WLP  ) would take some sort of hit. Medidata is likely to be more insulated, but its customers -- drugmakers such as Elan (NYSE: ELN  ) -- may not be, and that could take a toll.

Yet I'm still a buyer here. At current prices, I suspect that Medidata investors are being well compensated for the risks they're taking as owners. And I'm not alone.

As CAPS investor kong777 wrote:

Robust revenue growth year by year. The cash flow is strong. Net income might be low but it is norm when your company is in growing mode. A lot of depreciation makes the bottom line look bad but [cash flow] is far better.

Precisely. Medidata may be new to the stock market, recently engaging in a secondary offering to cash out some early investors, but it still produced more than $20 million in free cash flow over the last 12 months. Not bad for a company that's worth $347 million in market cap as of this writing.

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

Starbucks is a Motley Fool Stock Advisor selection. Elan is a Motley Fool Rule Breakers recommendation. WellPoint is a Motley Fool Inside Value pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the market-beating Motley Fool Rule Breakers team. 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 owns shares of Starbucks and 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 (1) | Recommend This Article (8)

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 December 24, 2009, at 1:31 PM, tkell31 wrote:

    PE on that seems off, expected eps next year is .78, at 15.30 a share that is closer to 19 to 1. It does look like it has a good future, just not as good currently as the PE above would indicate.

Add your comment.

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: 1073370, ~/Articles/ArticleHandler.aspx, 9/2/2014 6:22:59 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...


Advertisement