With the S&P 500 having doubled off its lows from the depths of the financial crisis and now trading slightly above 16 times earnings despite economic headwinds, the market as a whole seems either fairly priced or downright expensive (depending on your view of the world). Such markets pose a real threat to many investors because they diminish the opportunities available and increase the chances we'll overpay for stocks.

Fortunately, this news comes with a silver lining. Even in severely overpriced markets, investors can find bargains. In that vein, I recently ran a screen to try to uncover attractive opportunities in the market today.

Despite signs that the market today may be a tad pricey, my search still yielded several attractive candidates.

I included metrics that test for high margins, strong profitability, growth, and limited leverage. Most companies can only achieve one or two of these. Accomplishing all three is a sign of a great company. And it's insane when such excellent companies are trading at less than 10 times earnings.

Here are the metrics I used:

  • Return on equity, which demonstrates the return on capital a business can generate for its shareholders.
  • The EBIT (short for Earnings Before Interest and Taxes) margin, which provides a rough measurement of the percent of cash a company keeps from its operations. Companies that have profitable core businesses appear more attractive to investors since they can use that cash to return to shareholders or invest in future growth. Stripping out interest and taxes makes these figures less susceptible to dubious accounting distortions.
  • The EBIT growth rate, which demonstrates whether a company has been successful expanding its business.
  • I also excluded companies that had greater debt than equity.

I used five-year averages to help smooth away one-year irregularities that can easily distort regular business results.  

 

Company

Return on Equity

(5-Year Avg.)

 

 

EBIT Margin

(5-Year Avg.)

 

EBIT Growth

(5-Year Avg.)

P / LTM Diluted EPS Before Extra Items

Microsoft

42.6%

38.5%

10.6%

9.73

Vale S.A. (NYSE: VALE)

29.1%

41.1%

46.1%

6.02

Rio Tinto

29.1%

29.2%

42.5%

8.79

AstraZeneca (NYSE: AZN)

39.2%

35.2%

16.2%

8.92

Eli Lilly (NYSE: LLY)

25.6%

27.6%

13.2%

8.74

Corning (NYSE: GLW)

26.9%

18.6%

24.9%

9.07

Cliffs Natural Resources (NYSE: CLF)

26.0%

21.4%

77.9%

8.58

Diamond Offshore

34.7%

48.2%

49.5%

10.9

Taseko Mines (AMEX: TGB)

39.8%

19.3%

1,108.0%

6.55

Harbin Electric (Nasdaq: HRBN)

25.6%

29.6%

59.5%

8.22

Source: Capital IQ, a division of Standard & Poor's.

As is often the case, stocks become cheap because they are overlooked or stigmatized for some reason. These companies tend to fit the bill.

The obscure
For one group, you see beneficiaries of the boom in commodity prices (Rio Tinto, Vale, Cliffs, Diamond, and Taseko) appear widely here.  However, since these companies mostly operate outside the U.S, they're outside the familiarity of many investors. These companies have witnessed the prices of the commodities they sell shoot swiftly upward over the past several years. While these companies all demonstrated the smarts to exploit the boom in commodities, they all fit somewhat cleanly as a group within the context of the commodities run-up.

The unpopular
Negative expectations dominate the headlines for companies in the second group (Microsoft, AstraZeneca, Eli Lilly). Deserved or not, the market thinks the future looks more grim than the illustrious past for these companies. Microsoft's slow response to a software market expecting dramatic change in the coming years says "yesterday's news" to growth-hungry tech investors. Similarly, looming drug patent expirations have investors concerned that AstraZeneca and Eli Lilly will take an earnings hit in the coming years.

The Foolish bottom line
Markets swing wildly from cheap to expensive. However, even when stocks get pricey, investors need to resist the temptation to overpay. But a few bargains exist today -- you just have to know where to look.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.