Can We Get Much Higher: 4 Undervalued Stocks Near All Time High
James Dennin, Kapitall: Stocks are selling like Kanye tickets, with many trading near all-time highs. Are there any undervalued stocks left?
Stock markets leapt at Federal Reserve Chairman Ben Bernanke's announcement yesterday that the country would not begin tapering off its purchase of US bonds. As a result of the move, stocks and emerging currencies are up as bond prices fell.
[Read more from Kapitall: 5 Undervalued Stocks Intriguing Institutional Investors]
It's no surprise then after a rather bullish summer that a number of stocks are trading at enormously high prices. There's the perpetually news-worthy Tesla Motors (TSLA), which is up over 400% for the year and hovering around an all-time high of $174 per share. Tesla was up almost 9% this morning alone (as of 10:50 am). Meanwhile Netflix (NFLX) is trading over $300 per share right now. And don't even get us started on Priceline (PCLN), which passed the $1,000 mark yesterday, with room to grow before it hits its average target price.
With prices so high, is anything worth buying? We decided to run a screen on some of the best performing stocks so far this year that were trading at or near their all-time-highs as of this morning. We screened the roughly 160 companies from barchart.com for low price-to-equity ratios (P/E), in this case under 20. Then, because P/E ratios can be deflated for many reasons – we further screened our list based on a more rigorous stock screen, the DuPont Breakdown.
The DuPont Breakdown is a formula invented by the DuPont Corporation (DD) to refine and clarify the usefulness of return on equity (ROE) when it is reported by companies. ROE is an extremely important valuation for many investors, because it is one of the simplest ways to measure the profit from an investment. However, ROE can also be a little bit too simple, because firms can always borrow money to inflate their results, making it seem like they're doing a better job of getting returns to their shareholders than they really are.
The DuPont formula breaks down ROE into three components, so investors have a better idea of where a company's returns are coming from: operating efficiency, asset-use efficiency, and leverage. It does this by looking at profit margins, inventory turnover, and the equity multiplier, respectively. So, by virtue of the DuPont Breakdown: