by James Brumley | March 15, 2013 8:27 am
Do you like cheap stocks? Sure — everybody likes a bargain. A bargain stock is only worth owning, however, if that stock is likely to appreciate in value in the foreseeable future.
That’s one of the inherent dangers of using a basic stock screener to ferret out new trading ideas. The numbers may suggest a company is undervalued, but there’s always more to the story than historical numbers — namely, the future may look very different than the past.
With that in mind, here’s a closer look at some stocks that may look good based on a stock screen of low P/E names, but don’t necessarily have the brightest future.
Set-top box manufacturer Echostar (NASDAQ:SATS[1]) sports a trailing P/E of 16.0 … seems reasonable, right? But if you look a bit closer, you’ll realize that the first quarter of 2012 is skewing the snapshot here.
In that quarter, Echostar booked a bottom line of $1.45 per share. But though it was technically considered operating income, the bulk of that profit was a one-time event. In the three quarters following that quarter as well as the four quarters leading up to Q1 of 2012, Echostar never earned more than $0.41 a share; its average earnings for those quarters was $0.14 per share.
That outlier quarter doesn’t change the reality that the set-top box business is dying as services like Netflix (NASDAQ:NFLX[2]) and devices like Roku continue to chip away at the cable television business. Echostar is only expected to earn $0.06 a share this year.
To its credit, the company has made moves to adjust to the new era of digital consumption, like in introducing “TV Everywhere” and satellite-Internet hardware. But Echostar is well behind its competition on that front.
Gruma S.A.B. de C.V. (NYSE:GMK[3]) isn’t a household name … at least not in the United States. In Mexico, however, the $5.3 billion flour company is something of a hometown hero. The stock’s gained 38% since the end of last year too, winning over domestic as well as foreign investors. But that big run-up has come with a price.
While Gruma has plans to tap into the growing consumer market, traders may have overstepped the opportunity there. The pros are currently projecting per-share income of $0.21 for this year, translating into a forward P/E of 84.0. (That outlook sounds about right, as the company earned $0.20 per share in 2012.) There’s no amount of tortillas it could sell in China this year to justify that projected valuation.
U.K.-based marketing firm WPP plc (NASDAQ:WPPGY[4]) isn’t a bad company. It’s on pace to post a fourth straight year of increased revenue, and 2013 will likely be a fifth after acquiring Canadian advertising agency John St. and South African mobile marketing name Strike Media. More than that, WPP is profitable — something not every agency can say. The trailing-profit picture may be a little misleading, though.
Just for clarity, it’s not 2012’s numbers that are artificially inflated with WPPGY — it’s 2013’s. Current projections peg its per-share income at $6.17, making for a P/E ratio of 16.1. That’s the anomaly, though … and it seems to simply be a data error. Income in 2014 is projected to fall back to $1.34, more in line with the bottom line WPP put up in 2012, 2011, 2010, and so on. That translates into a forward-looking multiple of 60.9 — a valuation that’s anything but compelling.
Therein lies the rub with using a stock screener in the search for undervalued equities — the data can be wrong, and you’d never know it. And, where the data is not wrong, there’s still more to the story. There’s no substitute for an old-fashioned review of why the historical numbers stacked up the way they did.
Regardless of the reason, these three stocks may look juicy with just a quick glance, but none of them are must-haves when considering their actual outlooks.
James Brumley does not have a position in any of the aforementioned securities.
Source URL: https://investorplace.com/2013/03/three-cheap-stocks-to-avoid/
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