Finding Unloved Stocks

Where do I get my stock ideas? Where does anyone get their stock ideas? Well, the simplest and easiest way, besides listening to perennial blowhard Jim Cramer, is to screen for stocks like one would for a car or a washing machine. Since Consumer Reports doesn’t review stocks, we will have to turn to the Yahoo Finance stock screener. MSN money also has a stock screener, and Morningstar does as well. I like Yahoo’s the best, simply because it is the most flexible.

In screening, we can use our usual suspects: P/E, PEG ratio, dividend yield, market cap, price to book ratio, past earnings growth, as well as ROE or ROA. I’m sure you have done this before, so I won’t dwell on it.

By the way, the PEG ratio is what you get when you divide the P/E ratio by percentage annual earnings per share (EPS) growth. Thus, it is a measure of both current value and recent growth. As with P/E ratios, lower PEGs are better. There are a couple in depth articles about PEG ratios at investopedia linked from the above definition.
While you can calculate PEGs using past growth or predicted future growth, I know that analysts’ projections of future earnings are usually wrong. Yahoo Finance includes PEG ratios (listed under key statistics), but they are based on predicted growth, so I ignore them.

There are other ways to search for stocks, though. Since we are value investors, we will oftentimes be the buyers of last resort. When everyone else has sold a stock, and those who hold it are too shell-shocked to care anymore, when a stock is completely boring, we will buy. Of course, that is assuming that we want the company. Sometimes, companies such as this will be on their way to de-listing and bankruptcy. A few of those companies are good companies, perhaps with a few problems, perhaps just in unglamourous industries.

How can we search for companies such as this? Why not check public bulletin boards on the internet? For example, check out (briefly) the message board for XJT at Yahoo. There have only been a few posts in the last month. Both the bulls and the bears are just bored. That is a good sign that the stock is out of favor.

While we cannot sort the stock message boards at Yahoo by the number of posts, if we go to The Motley Fool, we can. Note: you have to complete a free registration to have guest access to Fool Bulletin Boards, although you do not need it just to glance at them, as we will do.

So, go to the Fool BB, and look at the ‘A’ stock boards. We can then sort by number of posts, and look at only those stocks with, say, 10 or fewer posts. We can look each of them up at Yahoo Finance, and then set aside any that have profits and a reasonable P/E ratio for a more detailed look. I did this today and then screened to remove stocks with lackluster PEG ratios.

Of course, since I was browsing through about 100 stocks and going by the past earnings growth of these companies, I was not actually calculating PEG ratios. I just eyeballed it. That is fine, as my goal was to find a few stocks, not 50 stocks. If I missed one or two, that was fine. Screening for stocks on such an abstract criterion as how ‘forgotten’ they is more of an art than a science. I’ll be mentioning a few of these stocks in detail in this and later letters, plus I will track the group as a whole just as an intellectual exercise. If you care to investigate them yourself, here they are: acu, atpl, aea, bcs, ezpw, gnw, hwg, max, nxy, oxm, oxps, ppp, ttm, vlgea, vsl, wlda. See stock quotes on all of them here.

Notice that a few of those (TTM and VSL) do not really belong on this list, as they are Indian stocks, and thus would likely be discussed less here in the US. Now, this is not an ideal screen, and many of these companies are probably a waste of our time (such as HWG, which has a P/E of 1 only because they sold off a huge chunk of their company). That being said, I hope this serves as a good example of a slightly different way to search for stocks.

[This was originally published October 2005 in The Everyday Investor, my defunct investing newsletter.]

Addendum: in the year since I published this article, the stocks mentioned soundly beat the stock market as a whole. Also, now that Motley Fool has its CAPS paper trading game, you can search for unloved stocks by searching CAPS for highly rated stocks that are rated by only a few people.

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