Everybody loves a cheap stock and everybody loves a stock that's fast-growing.
It's finding the stock that, despite growing fast, is also cheap, that's the real trick. Birds of these two particular feathers, don't often flock together. But if you know where to look, and how to look, you just might get lucky enough to find one.
And in fact, I just found four.
Earlier this week, I was handed the not-so-easy task of digging up a handful of stocks, each costing less than $10 per share, that might be worth a look by investors. Not much came immediately to mind, but fortunately, I knew where to look for some ideas.
Turning to finviz.com's free stock screener, I input parameters seeking stocks of reasonable size ($300 million in market capitalization and up), selling for reasonable P/Es, and -- this is key -- growing fast enough that their P/E ratio wasn't any bigger than their long-term projected percentage growth rates. (In investing shorthand, we call this looking for stocks with a PEG ratio of less than 1.0).
In no time at all, the screen spat out a list of four stocks that might fit the bill. Here they are for your review.
Hertz Global Holdings (HTZG.Q)
Our first candidate is a name that should be familiar to all: Hertz, the rental car company. The screener indicates that Hertz is priced at about 13.7 times earnings, and projected to grow these earnings at an astounding 23.2% annually over the next five years. Hertz at first appears to be an incredible bargain.
Emphasis on "at first."
Hertz offers investors a lesson in the perils of stock-screening: Even if all the data your screener generates proves accurate, upon further research you may discover that there's something else you should have screened for but didn't. In Hertz's case, the "didn't" is debt.
Valued on its $3.7 billion market cap Hertz Global does, in fact, sell for about 12.7 times earnings (screener indicated 13.7 but after further investigation I reached 12.7). Neither of these numbers, however, takes into account the fact that Hertz Global is carrying well over $15 billion in net debt on its balance sheet. Factor that into the valuation calculation, and Hertz's debt-adjusted price (its enterprise value) is actually closer to 64 times earnings -- making the stock about four times more expensive than first meets the eye.
Next stock, please.
SLM Corporation (SLM 0.97%)
Our next potential stock pick is another familiar name -- even if you may not recognize it at first. SLM Corporation, you see, is the official name of the educational lender better known to college students (and their parents) as "Sallie Mae."
SLM Corporation sells for a modest 9.9 times earnings and is projected to grow those earnings at about 10.4% annually over the next five years. Last quarter, SLM Corporation did even better than that, growing earnings 38% on only a 14% rise in revenue. The lender boasts admirable numbers for both return on assets at 2.1%, and return on equity at 14.6%, and minimal debt. It pays no dividend, but as a value play, SLM Corporation seems to have a lot to recommend it.
Sportsman's Warehouse Holdings (SPWH -0.65%)
In our final two selections, we turn to the retail sector, often a reliable hunting ground for value investors trusting in the resilience of America's consumer-driven economy. We begin our hunt with Sportsman's Warehouse, the Utah-based purveyor of outdoor sporting goods.
Priced at 15.2 times earnings, and expected to grow these earnings at 16.2% annually over the next five years, Sportsman's Warehouse at first glance looks like an attractive value investment. There are, however, caveats to this initial assessment.
The stock pays no dividend, for one thing, meaning that if you hope to profit from an investment in the stock, you need to depend entirely on having the stock itself rise in price. Sportsman's Warehouse also carries a sizable slug of debt -- nearly $200 million net of cash -- which is nearly half as much as the company's own market capitalization.
Worst of all, data from S&P Global Market Intelligence show that Sportsman's Warehouse generated less than $2 million in actual cash profits last year, despite reporting net income under GAAP accounting standards of nearly $28 million. That's actually an improvement over the company's performance in the previous two years, but in both of those years it burned through cash. Even so, it's strong evidence that Sportsman's Warehouse is not as profitable -- or as cheap -- as it seems at first glance.
I think it's best to leave this stock on the shelf, too.
1-800-Flowers.com (FLWS 1.50%)
And finally, we come to the best prospect of the bunch: 1-800-Flowers.com.
I probably don't have to tell you about 1-800-Flowers.com's business. Even if you haven't seen the commercials, the name pretty much speaks for itself. What I will say, though, is that at a P/E ratio of 13.8, and with analysts projecting that 1-800-Flowers.com will grow its earnings at 20% annualized over the next five years, this is one cheap-looking stock.
It's also encouraging to see that the company reported positive free cash flow of $34 million last year, enough cash profit to back up 92% of reported net earnings. More encouraging still -- in each of the five past years, 1-800-Flowers both generated positive free cash flow and generated more cash profit than it was permitted to characterize as net income under GAAP accounting rules. Translation: This stock is a whole lot more profitable than it looks, even at first glance.
The company does carry a bit of debt -- $60 million more than it has cash on hand. But given the cheap stock price, and 1-800-Flowers' record of consistent and strong free cash flow, I think it's the pick of the litter.
