Bargain Stocks Are Still Out There

Are you feeling like things are getting a little too overheated?

Consider these two bits of information, both of which I ran across on Monday:

• Companies are hoarding lots of cash. According to a Wall Street Journal report, companies are holding more cash than at any time in the past 40 years -- an average of nearly 10% of assets at the 500 largest non-financial U.S. companies.
• Insiders are selling. According to one estimate, stock sales by corporate insiders are currently outpacing insider purchases by as much as 10 to 1, with insiders at companies like Nike (NYSE:NKE) and Cree (NASDAQ:CREE) selling substantial positions in recent weeks.

Now, there are lots of ways we can spin those two data points, but the one that comes to my mind is this: Knowledgeable people think that better investment opportunities lie in the future.

Or put another way: Opportunities are looking expensive right now.

Opportunities like the stock market, for instance.

Fully priced and then some
Economist Andrew Smithers recently opined, in an interview with Bloomberg, that the S&P 500 was about 40% above his estimate of fair value around 770 (as of late October). Now, economists opine on all sorts of things all the time, but as my fellow Fool Alex Dumortier recently pointed out, Smithers is a guy to listen to -- his past calls on market value have often proven prophetic.

Smithers said that the world's central banks and their "quantitative easing" programs, which have essentially flooded credit markets with cheap cash, have led to an asset bubble -- the current stock market rally. As those programs draw to a close, which they will eventually, Smithers believes that the bubble will deflate, and the market will flop down to something more like fair value.

Smithers isn't the only one saying that the market has gotten well ahead of itself, and that things could turn once the flood of cheap capital abates. Thoughtful market commentators like David Rosenberg and mere humble Fools like yours truly have been skeptical of the foundations of this run for a while now. With stocks like Amazon.com (NASDAQ:AMZN) and Starbucks (NASDAQ:SBUX) sporting trailing price-to-earnings ratios of well over 50 despite subdued (at best) growth expectations, clearly some things have gotten out of whack.

But that doesn't mean everything has gotten out of whack.

Uncovering value possibilities
If you know where to look, there are still plenty of bargains to be had. Let's be clear about this: When I say "bargain," I'm looking for a great company selling at a discount price. For starters, I want to see a price-to-earnings ratio below 15 or so, and a price-to-free-cash-flow ratio in the same range -- those are two quick ways of looking at value. I also want to see a low ratio of long-term debt to equity and a strong return on equity -- two quick ways of looking at the company's health and management.

I just spent a few minutes playing with a screener and turned up these possibilities:

Source: Motley Fool CAPS. Data as of Nov. 3.

These are just points of departure for further research right now, not formal recommendations. Specifically -- and this points up the need for doing careful research before buying -- Amgen is kind of a poster child for the factors I was talking about at the beginning of the article. Not only are they a big cash hoarder, with some $14 billion on hand as of the most recent quarter, but Amgen insiders have been selling at a heavy rate lately -- many at prices below recent levels. I'd take a long, hard look at that one before considering a buy.

But that said, there are definitely bargains worthy of your attention out there (Hint: If you do nothing else after reading this, take a look at Pharmaceutical Product Development). But if you'd like to skip the research grind and check out some pre-vetted value ideas to buy today, help yourself to a 30-day free trial of the Fool's Inside Value service. There's no obligation to subscribe.