Is This Stock a Health-Care Bargain?http://www.fool.com/investing/value/2010/12/29/is-this-stock-a-health-care-bargain.aspx James Early
December 29, 2010
I'll bet dollars to doughnuts you've never heard of Lakonishok, Schliefer, and Vishny -- unless you're a total investing dweeb like me. But before they founded LSV Asset Management, which now has $51 billion under management, they were obscure academics about to publish a very famous paper. Best of all, their insights can help you find stocks that will stack the odds of a successful investment in your favor. Read on to see if it can make you money in health-care stocks.
Turning investing upside down
LSV next divided stocks into groups using a formula based on sales growth. Amazingly, they found that boring businesses with low sales growth outperformed flashy high-growth companies by 7.3 percentage points per year.
Best of all, LSV found that a portfolio combining the high-E/P and low-sales-growth approaches outperformed its opposite -- high-P/E, high-growth stocks -- by 11 percentage points per year!
I keep LSV's formula in mind every month when I'm selecting dividend stocks for my Income Investor newsletter. Let's use it right now to dig up a slow, cheap, and potentially outperforming value stock for your own consideration. I used data from Capital IQ (a division of Standard & Poor's) to unearth companies trading at a P/E less than 7, with sales growth of less than 3% last year.
Separating the fakers from the money makers
Let's grab a stock -- any stock -- that came from the Capital IQ screen and see what we can learn.
Result: Tenet Healthcare (NYSE: THC )
Industry participants can range from clone competitors to nearly unrelated businesses, but their valuations provide initial perspective.