And then, poof!

Before value investors could even blink, stocks moved higher and, so far, haven't looked back. Over the next 8 months, the valuation on the S&P 500 nearly doubled.

Make no mistake; the rally has been great. Every investor has benefitted. For value investors, current market conditions are both the best of times and the worst of times.

Who doesn't feel a tinge of jealousy as growth investors cash in on multi-decade highs for stocks like Amazon.com? If you're like me, sometimes it's tempting to just throw in the towel and follow the crowd into the growth stocks, even if they are trading with P/Es at 50 or higher.

But never fear. Value investing isn’t dead. Value stocks are still out there, even amidst this once-in-a-generation stock rally. It’s just a matter of digging deeper than usual to find them.

Look Beyond the P/E Ratio

Most value investors know to look at the price-to-earnings ratio (or P/E) to find stocks that are undervalued. To find true value remember that the lower the P/E, the more undervalued the stock.

Many value investors use a P/E under 20, which is a great starting point in normal markets. However, stocks are more expensive now.

So while you should start with the P/E ratio, don’t end there. You’re going to need some more tools in your arsenal to find the true value stocks.

3 Tools to Use to Dig for Value Stocks

1. Use Price-to-Sales
   Many value investors neglect the sales component, which is a mistake since sales, unlike earnings, cannot easily be manipulated. There are no "charges" or "exclusions" or other accounting hocus pocus with sales. They usually are what they are, which makes it easy to compare quarter over quarter and year over year. The lower the P/S ratio, the better. Look for a P/S ratio less than 1.
2. Growth is still your friend
   Growth? For value investors? Value investors can use the PEG ratio, which is the price-to-earnings ratio (P/E) divided by earnings growth. Once again, the more undervalued the stock, the lower the PEG ratio. Look for PEG ratios under 1 for undervalued stocks.
3. Look at the Industry Rank
   This is a little known factor that can give you powerful results when used with a value metric. Zacks ranks industries according to improving earnings prospects, so value investors can look at the Industry Rank lists to get an idea of which industries have rising earnings estimates. The Zacks Industry Rank is the average of the Zacks Rank for all companies in the industry. Just like with the Zacks Rank, the lower it is, the better. So a Zacks Industry Rank of 1.00 is better than one of 4.35.

Value Is King in Bull and Bear Markets

Numerous studies of bull and bear markets throughout the world come to one conclusion: it may not be glamorous, but value investing outperforms growth investing over the long term.

Is it any surprise that one of the greatest investors of all time, Warren Buffett, is a value investor?

Now is the time to stay the course. Don’t let the expensive stocks like Amazon blind you with their glamour. Value is still king.

Digging for Value Every Day

I know how frustrating it is to find value stocks as the markets continue to climb. I seek out value stocks every trading day with the Zacks Value Trader trading service, and some days there just isn't much to get excited about. But all it takes is finding a hidden gem here and there for a value investor to really profit.

Just a few days ago, for instance, I added an American generic drug company to the Value Trader portfolio. It has great "digging deep" value fundamentals, such as a price-to-sales ratio of just 0.9 and a low PEG ratio of 0.19. On top of that, analysts believe it has great earnings growth prospects of 52.26% over the next five years. Amazon, by comparison, is expected to grow at just 32.56% over the same time period. Take that Amazon!

The Value Trader has dug deep to find many other great stocks in 2009 and is up +38.5% over the first 9 months of the year. That is nearly double the S&P 500 over the same time period, proving that value hasn’t gone away; you just have to know where to look.

I invite you to see what stocks are in the portfolio and learn the secrets behind the Value Trader's success. Be sure to check it out before the special offer ends on Saturday October 31.

About Zacks Value Trader

All the Best,

Tracey Ryniec

Tracey, as Zacks Value Stock Strategist, helps Zacks.com customers find the best value stocks through her daily commentary. She is also the Editor in charge of the market-beating Zacks Value Trader.

• Hasbro (NYSE:HAS) reported third quarter earnings of 99 cents, versus Zacks estimates of 92 cents a share, although revenues of $1.28 billion were below Zacks projections of $1.34 billion

• BB&T (NYSE:BBT) reported third quarter fully diluted results of 23 cents versus 65 cents a year earlier, inline with Zacks estimates of 23 cents. According CEO King, "Our revenue growth for the quarter was very strong at 16.1%, the net interest margin is improved, growth in noninterest-bearing deposits is exceptional and the impact from the Colonial acquisition is positive. However, our earnings continue to be negatively affected by a significant provision for credit losses and other costs related to the credit environment"

• FBR upgraded American Express (NYSE:AXP) shares to "market perform" from "underperform," with the price target lifted to $37 from $25

Kroger declared a quarterly dividend of 6.5 cents a share in 2006. The next year, it raised its payout to 7.5 cents and again to 9 cents in fiscal year 2008.

The dividend is payable on Dec. 1 to shareholders of record as of Nov. 16. Kroger has been able to augment shareholders’ return by over 1.5% on a yearly basis through its dividend program.

Earlier, Kroger reported lower-than-expected second-quarter results amid a crumbling economy, beleaguered by rising unemployment and weak consumer trends.

Kroger’s quarterly earnings, which came in at 39 cents a share, missed the Zacks Consensus Estimate of 43 cents and dropped 7.1% year over year. Total revenue fell 2% to $17,735.4 million. The company also trimmed its full-year earnings guidance to a range of $1.90 to $2 per share, down from its prior view of $2 to $2.05 a share.

Kroger runs 2,470 supermarkets and multi-department stores in 31 states under local banners, which include Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City Market. It also operates 768 convenience stores, 388 fine jewelry stores, 818 supermarket fuel centers and 40 food-processing plants.

Moreover, King faced several regulatory setbacks and is yet to gain approval for its key pipeline candidate, Embeda. The delay in Embeda's approval has been frustrating and we expect investor focus to remain on this event. While King is optimistic about gaining approval for Embeda later this year, non-approval would be a major blow.

Pipeline setbacks, increasing competition, generic threats and declining prescription trends are likely to weigh on the stock. We have an Underperform rating on the stock.Zacks Investment Research

Moreover, King faced several regulatory setbacks and has yet to gain approval for its key pipeline candidate, Embeda. The delay in Embeda's approval has been frustrating and we expect investor focus to remain on this event.

While King is optimistic about gaining approval for Embeda later this year, non-approval would be a major blow. Pipeline setbacks, increasing competition, generic threats and declining prescription trends are likely to weigh on the stock. We have an Underperform rating on the shares.Zacks Investment Research

If you are anything like me you have spent more than a year avoiding anything with "bank", "financial", or "investments" in the company's name. However, over the past week some of Wall Street's giants have exceeded expectations and have a brighter outlook on the future.

Equity markets have been on a tear since early March, rising roughly 40% in just a few months. Prior to several key bank announcements the indices have leveled off as investors began to seek validation for the sharp rise and it looks like they have found it.

JPMorgan Chase (JPM) reported a 36% rise in net income as earnings per share of 28 cents easily beat the consensus of 4 cents. Goldman Sachs Group (GS) also topped forecasts. On July 14 the investment bank announced second-quarter results that included earnings per share of $4.93, well above the consensus of $3.52. Earnings were up 35 cents year-over-year.

So...Rush Back to Financials?

Not so fast. After you look deeper into the numbers you will see that these record revenues stem from a favorable trading environment, which is not always the case. Not to mention the life line thrown to banks by the government in an effort to prevent an, arguably, inevitable financial collapse.

Also, JPMorgan's earnings are still down from last year.

And don't forget about the turmoil surrounding commercial lender CIT Group (CIT) which is facing a possible bankruptcy and/or a government bail out.

What's Your Point?

What I am trying to say is that while the financial industry is no longer the investment quick sand it used to be, but as with any area due diligence and common sense is still king. Smaller banks remain volatile as the titans of the industry soak up marketshare and government funding.

I screened for a few companies in the sector that hold a Zacks rank of #1 or #2, price-to-book ratio of between 0.5 and 2.0, and upward movement in the full-year consensus estimate for this year.

Some of the companies I currently like are:

Goldman Sachs Group (GS) in addition to the brief earnings info I mentioned before, I also like Goldman because of favorable upgrades from analysts, including Meredith Whitney. The consensus estimate for 2009 is up $3.59, to $13.61, over the past 3 months, including 54 cents since the announcement. Estimates for next year are averaging $14.50, up from $12.08 over the same time period.

Deutsche Bank (DB) is trading at a good value and has massive upward revisions. The consensus for this year is pegged at $6.36, up from $3.78 over the past 3 months. Compared to the $11 loss from last year and you have solid growth. Not only that, but shares will cost you just 7.5 times earnings.

Piper Jaffray (PJC) is another investment bank that is turning the corner and emerging from the abyss. Estimates for this year are now averaging a $0.25, up from a 17 cent loss after all 4 covering analysts have raised forecasts. The consensus estimate for next year is $1.40, up 45 cents after 6 revisions amongst the analysts. Compare this to the $2.35 loss last year, and you have triple-digit growth for the next 2 years.

In Closing

Like I said earlier, it is time to pull our heads out of the sand and start considering financials again. Now, more aggressive investors probably did this a while ago, so this is geared toward those of us burned by financial institutions in the recent past.

However, don't just dump it into a diversified fund that contains those banks still suffering. Pick a handful of solid financials and beef up the once neglected segment of your portfolio.

Additional Resources

Research Wizard Trial Offer - Screen for you own stocks for FREE, with a 2-week trial offer. Zacks Investment Research

Before we begin, let's explain the contrarian stance that makes Schaeffer's so unique. When searching for a bullish pick, we like to see heavy skepticism toward an outperforming stock, as this leaves ample room for upgrades or other positive catalysts to fuel the stock higher. When searching for a bearish pick, on the other hand, contrarians are looking for significant bullish sentiment toward an underperforming stock, as we believe an excess of optimism is a sign that everyone has already bought into the stock and sideline money is virtually tapped out.

However, keep in mind that some optimism and pessimism is genuinely warranted and isn't always a contrarian indicator - like an outperforming stock with many "buy" ratings or an underperforming stock with a plethora of "sell" ratings.

According to the Zacks screener, LM saw roughly 19,600 calls and 9,200 puts change hands Thursday, Jun 25, more than 6 times its average daily volume of about 2,900 and 1,500 contracts, respectively. What's more, the 25 strike was most popular among both the bulls and bears. The stock's Jul 25 call saw single-session volume of 4,131 contracts, while the July 25 put saw nearly 1,800 contracts cross the tape.

The at-the-money 25 strike is now home to peak put open interest in the front-month series, with about 1,200 contracts in residence. However, the in-the-money 24 strike is still king of July-dated calls, harboring open interest of nearly 3,000 contracts.

Thursday's inclination for more calls than puts echoes the recent trend on the International Securities Exchange (ISE). During the past couple of weeks, speculators on the ISE have bought to open more than twice as many bullish than bearish bets on LM. Furthermore, the equity's 10-day call/put volume ratio of 2.46 ranks in the 82nd percentile when compared to similar readings taken during the past year, suggesting that traders on the ISE have rarely been more optimistically aligned toward LM.

Further evidence of the bullish presence in the options pits is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.57, which implies that calls nearly double their bearish rivals among the front three months of options. In fact, the security's current SOIR stands only one percentage point shy of an annual optimistic acme.

Getting back to Thursday's surge in option activity, it seems investors may have been placing their bets after the Wall Street Journal squashed a recent rumor. More specifically, the WSJ reported that, contrary to popular belief, activist investor Nelson Peltz hasn't accumulated a bigger stake in Legg Mason. During Wednesday, Jun 24's session, the shares of LM had skyrocketed about 10% on whispers that Peltz was preparing to challenge management.

Now that the grapevine's been torn to pieces, where does that leave the stock?

Shares of LM have been a bright spot on the Street lately, outshining the broader S&P 500 Index (SPX) by 32% during the past 60 trading sessions. In fact, since skimming the $11 level in early March, the equity has more than doubled, and is poised to close the month atop its 10-month moving average for the first time in two years.

However, despite the stock's impressive run higher lately, not everyone's impressed. According to Zacks, only 2 of the 10 ranking analysts deem LM worthy of a "buy" or better rating.

Also on the bearish bandwagon are short sellers. Short interest on LM ramped higher by 24.3% during the past month, and now accounts for 20.1 million shares, or 14.5% of the stock's total available float. At the equity's average daily trading volume, it would take about a week for all of these pessimistic positions to unwind.

Nevertheless, the skepticism among analysts and short sellers could be a potential boon for LM in the short term. Should the shares continue their upward trajectory, the bears could get spooked. A fresh round of upgrades and/or price-target boosts, or a short-covering rally, could help fuel the stock's voyage into the black.

Zacks Investment Research

Author: InformedTrades
Added: Fri, 30 May 2008 01:19:34 -0800
Duration: 402

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