Top Deep Value Plays
Our Top Deep Value Plays for Investors with a 1 to 2 Year Time Horizon
At Singular Research, we focus on small and micro-cap stocks that are undercovered on Wall Street. These stocks have a niche business model and have yet to be widely discovered. As a result of the recent market decline from the Corona virus pandemic, several of the companies under our coverage now pose great buying opportunities for the investor with a longer-term time horizon. To start our discussion, we will first show a market comparison of where the market is today versus the market conditions in 2008/09. We will then describe five of our top, most undervalued coverage, why we believe so, and where we see these companies headed in 2021 and beyond.
A Comparison of the S&P 500, Now vs. 2008
By comparing current conditions of the S&P 500 to what they were in 2008, we want to show investors that the stock market is not valued much differently than what it was twelve years ago. There are, however, arguments for and against whether we are at a current market bottom. The point of this research article is to help one understand current company valuations and realize that there are attractive buying opportunities to the patient investor with a long-term time horizon.
First, before discussing our top undervalued ideas, we will help you understand the value metrics that lead us to believe these companies are truly undervalued. Value ratios such as debt-to-equity help us understand if the company’s balance sheet is strong and likely to withstand recessionary times by not having excess interest payments. A company’s book value (assets minus liabilities) per share helps us understand what the true value of the company is regardless of where the stock price is currently trading. Furthermore, once we have a good understanding of the true value of the company, we look at its relative valuation, or how the company is trading relative to its peers. In this article, we will look at the price-to-earnings, price-to-book, price-to-sales, and enterprise value-to-ebitda ratios.
Olympic Steel, Inc. (ZEUS)
$14.75 Price Target, Buy, Current Price: $8.83 (4/7/20)
Olympic Steel is a leading U.S. metals service center focused on the direct sale and distribution of large volumes of processed carbon, coated and stainless flat-rolled sheet, coil and plate steel, aluminum, tin, pipe, and tubular products.
For Olympic Steel, we want to emphasize the firm is largely undervalued from a book value per share perspective. The firm trades $18 below what it is currently valued for its equipment and machinery. Similarly, the industry average price-to-book ratio for iron and steel producers is 1.01. ZEUS’s price-to-book ratio is 0.71 below the industry average. If ZEUS were to trade at the industry average price-to-book ratio, the share price would be $27.18, over three times where it currently trades.
Banco Latinoamericano (BLX)
$24.00 Price Target, Buy, Current Price: $9.85 (4/7/20)
Banco Latinoamericano, a multinational bank, primarily engages in the financing of foreign trade in Latin America and the Caribbean. The company operates through two segments, Commercial and Treasury.
Bladex earned $86 million in 2019 and has a dividend yield of 15.6%. The company has paid a dividend of $0.385 per share since 2014. The company, too, is undervalued on a book value per share basis as BLX trades $15.63 below its book value per share. On a relative valuation basis, the average price-to-book ratio for regional banks is 0.82; therefore, if BLX were to trade with its peer average, BLX should be valued at $20.89. Furthermore, BLX’s P/E ratio is 2.85 below its peer group average. On a P/E basis, BLX should be trading at $16.17 if it were to trade in-line with its peers.
Comtech Telecommunications Corp. (CMTL)
$30.25 Price Target, Buy, Current Price: $14.76 (4/7/20)
Comtech Telecommunications Corp. designs, develops, produces, and markets products, systems, and services for communications solutions in the United States and internationally. The company operates through Commercial Solutions and Government Solutions segments. Comtech Telecommunications Corp. was founded in 1967 and is headquartered in Melville, New York.
Although not trading near its 52-week low, CMTL, like the aforementioned, is trading below its book value per share. The industry average for communications equipment companies’ P/E, P/B, and P/S ratios is 20.0, 1.83, and 2.64, respectively. On those three ratios, CMTL is trading vastly below their peers. If we were to equally average those three ratios and use CMTL’s trailing twelve month earnings and sales per share, we would come up with a fair value price target of $46.87. CMTL’s EV/EBITDA ratio of 5.90 is also well below its peer group average of 18.69.
L.B. Foster Co. (FSTR)
$18.75 Price Target, Buy, Current Price: $13.40 (4/7/20)
L.B. Foster Co. engages in the manufacture, fabrication, and distribution of products and services for the transportation and energy infrastructure. The company operates through the following segments: Rail Products and Services; Construction Products; and Tubular and Energy Services.
As investors feared the worst regarding the Corona virus and its negative effects on the U.S. economy, L.B. Foster has had a wild ride. The company is trading below its book value per share, although not as badly as some already mentioned. For a company that is still earning money, we believe FSTR has and will weather this storm nicely. At P/E, P/B, and P/S ratios well below the industry peer averages of 9.04, 1.06, and 0.59, we believe FSTR has more room to the upside. The firm’s EV/EBITDA ratio is also below its peer average of 7.93.
REX American Resources Corp. (REX)
$90.00 Price Target, Buy, Current Price: $47.54 (4/7/20)
REX American Resources Corporation, together with its subsidiaries, produces and sells ethanol. It operates through two segments, Ethanol and By-Products and Refined Coal. The company also offers dried distillers grains, modified distillers grains, and non-food grade corn oil.
Lastly, we believe REX is undervalued and has a much higher potential. As fears of the Corona virus ease and China starts to demand ethanol, we believe that REX’s valuation metrics will increase from current levels. Specifically, REX’s price-to-book and price-to-sales ratios are below their peer group average of 0.80 and 1.34. If REX begins to trade in-line with its peers, we believe its share price could almost double from where it currently trades.
One common theme in these stocks is that they are all trading below their book value per share, P/E, P/B, P/S, and EV/EBITDA ratios. We believe, with time, that these stocks will not only realize their true valuation but exceed their potential. If one has a long-term time horizon, any one of these stocks would be a good buy and hold candidate.
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