Money & Investing
Sometimes, Buying "Cheap" Can Be Attractive
A Look at Sally Beauty and U.S. Auto Parts Stocks
I don't know about you, but, when I go shopping and see something "on sale" and selling at a low price I get very suspicious.
I say to myself, what is the catch? Is there something I don't know about? Is the product okay, or is there a hidden defect?
When it comes to stock picking, this same approach should be used in most cases. However, when one is in a bull market, the bulls can be a bit more venturesome.
Nevertheless, the same, basic fundamentals and technical analysis work should be done, and the same disciplines for setting up protective stops should be used. In a bull market, money, in general, is flowing into stocks via greater allocation. So, there are better chances of latching onto a low-priced stock and watching it climb.
At this point in the stock market, it appears "bargain hunters" are welcomed.
When looking for low-priced stocks, keep several important guidelines in mind:
- Price of the stock
- Earnings outlook
- Technical pattern
- Valuation
- Institutional sponsorship
When seeking good, low-priced stocks, one should be looking for issues probably in the 5- to 10-dollar range. If you get below that, you need to be extremely careful. You definitely do not want to go looking for "penny stocks". They are too risky, despite any ads you might see, saying, "I made a billion dollars investing in penny stocks."
The ideal, low-priced stock should have a good earnings outlook. In many cases, it would have a good product or service that is in demand. The driver could be the expansion of a product line or the geographical area where a company does business.
You do not want to go after low-priced, medical stocks that are sporting red ink. That is another game entirely. Those stocks are very speculative with a lot depending on, in most cases, the development of a new product. Some institutions go after those stocks, but, in most cases, they "shotgun" them with the hope of hitting one big winner. That is not for the average investor.
You want a low-priced stock whose technical pattern is favorable. By that, we mean that it is showing an up trend and, then, preferably poised to break out from a base. Even though the stock may be low-priced, it should still be able to show some sort of technical upside price momentum.
The stock's valuation should be reasonable. One should be careful of a low-priced stock with an extremely high valuation. That would indicate risk and also chase away those institutions that are bargain hunters.
Finally, the low-priced stock should have good institutional sponsorship. That means some top-performing funds have looked at the stock, liked what they saw and put their money up. If the institutional sponsorship is almost nil, or of poor quality, beware. One low-priced stock that fits the bill so far is Sally
Beauty Holdings, Inc. (SBH), trading on the Big Board at 9.20.
The company, with annual sales of $2.7 billion, sells professional beauty supplies through some 3,727 stores in the U.S., South America and Europe.
It also uses professional sales distributors. SBH has been active in making acquisitions to expand operations.
Analysts forecast that net for the fiscal year ending September 30 should climb 32 percent to 69 cents a share from 52 cents a year ago. Next year, they look for a 16 percent gain in net to 80 cents a share.
The stock sells with a price-earnings ratio of just 13. That is a low valuation, given that it is less than half the 32 percent earnings growth of this year. So, the valuation looks like a real bargain.
Sally Beauty has very good institutional sponsorship. The largest fund holder is Fidelity VIP Mid Cap Svc Fund with a 5.6 percent stake. The Fund has a 4-star rating from Morningstar. The largest fund buyer recently was Fidelity Advisor Mid Cap Fund, 3-star rated, which purchased 523,093 shares.
Another good-looking, low-priced stock is U.S. Auto Parts Network, Inc. (PRTS). The company, with sales of 2.7 billion dollars, is an online provider of auto parts. The stock became public in 2007 and traded at approximately 10 dollars. However, it fell to 1.22 in 2009 during the bear market. It has since rallied to 8.69 (see following chart). The stock is in an up trend and moving close to a new, all-time high.
This year, analysts project a 189 percent surge in U.S. Auto Parts' net to 14 cents a share from 5 cents a year ago. Going out to 2011, they see a 39 percent gain in net to 20 cents a share from the anticipated 14 cents in 2010. The stock sells with a price-earnings ratio of 62. That is high but okay, given the earnings growth rate this year.
U.S. Auto Parts' top fund holder is 4-star-rated William Blair Small Cap Growth I Fund with a 2.7 percent stake.
Some other good-looking, low-priced stocks are Power One, Inc. (PWER), trading at 5.55, Health Grades, Inc. (HGRD) at 6.87, Summer Infant, Inc. (SUMR) at 6.51 and Saba Software, Inc. (SABA) at 5.10.
Power One's earnings this year should climb sharply from a loss a year ago. Health Grades should post a 20 percent gain in net this year and a 35 percent rise in 2011. Summer Infant's profits should climb 34 percent this year and 34 percent next year. Finally, Saba's net should leap 150 percent this year and 33 percent next year.Mr. Fasciocco is the publisher of Ticker Tape Digest at www.tickertapedigest.com. He is a contributing writer for several publications. Mr. Fasciocco can be reached at leo@tickertapedigest.com.
