Every once in a while, I like to do a very basic screen. I take a look at companies with a market cap under $15 billion, a price-to-book ratio of less than 2, and a price-to-earnings ratio of less than five. It's a screen that is prone to error, and you can usually whittle down the 1,000-plus results in minutes because of penny stocks, stocks with zero liquidity, and obscure foreign-listed entities. But there are also usually a few companies that are well-known names with surprisingly low valuations. Let's take a look at three you know and love to determine whether they're worth your attention. Value hunters, unite!
A hard drive
Few technology companies trade at a P/E of less than 5. This century has groomed us to accept lofty valuations and pay 15, 25, sometimes 300 times earnings for a hot tech stock. For a value-oriented investor, it's often too heart-wrenching to pay up for even the most promising technology or wunderkind management. But Seagate
The hard-drive manufacturer has been a major win as of late for hedge-fund manager extraordinaire David Einhorn, who loaded up on the stock last year. From fiscal 2011 to 2012, EPS growth measured a staggering 450%. It wasn't totally organic growth, as the company benefited from a supply-chain disruption caused by the Thai floods last year. Competitor Western Digital
Though the company is still relatively cheap, there are a few things to keep an eye on before making an investment. For one, Western Digital has recovered from the supply-chain issue and is steadily taking back market share lost over the past 12 months. The 450% EPS gains are not expected to repeat anytime soon. In addition, solid-state drives are coming down fast in price, as technology always does. This will, as management mentioned, cut into the fat margins the company has been enjoying up to this point.
Seagate is cheap on the surface, but a murky future for the company and the fact that the stock has already made substantial gains year over year would keep me from diving in any time soon.
One of the most heavily followed companies on the Fool is also a cheap trade -- Sirius XM Radio
Sirius is a difficult stock to assess at the moment. The impending-but-not-quite-yet takeover from Liberty Media
Challenges for the company include rising content costs and competition from Internet-based radio. It's also often said that the company is too well followed for the market to hold any inefficiencies in its pricing. The latter is the strongest argument, in my mind, against investing in the stock.
To me, Sirius is a good company as a standalone or as a takeover target. Similar to Seagate, it's enjoyed a nice run this year and isn't quite as cheap as we'd like it to be. But it's certainly still worth a look if you want a low-P/E tech in your portfolio.
For profit (or not) education
A sector that nearly all of Wall Street used to love has fallen on tough times. For-profit educators have been accused of loading up students with debt with no clear avenue to a career (I'm not sure nonprofit post-secondaries circumvent this issue) and not providing an education that's on par with its nonprofit competitors.
On the whole, I'm not a fan of for-profit education. Beyond the moral implications, it has just been a lousy business to be in the past few years.
Bridgepoint should probably be viewed as a riskier investment, if anything. The legal difficulties facing the company and the lousy industry climate will keep most investors out. But deep value hunters may like the recent 50% dip the stock price took while revenue has more than doubled since 2009. In the same time, operating income has more than tripled.
If the legal issues are resolved anytime soon, the favorable income statement may shine through and cause a nice rebound in stock price over the next year or two. I would keep a close eye on this story and consider it a contrarian play.
As always, do your homework before getting anywhere near a priced-for-doom company. I believe the market is inefficient, but it can always catch us sleeping if we aren't careful.
Fool contributor Michael Lewis owns none of the stocks mentioned above. You can follow him on Twitter, @MikeyLewy. The Motley Fool owns shares of Western Digital and Bridgepoint Education. Motley Fool newsletter services have recommended creating a synthetic long position in Bridgepoint Education. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.