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3 Best Bargain Stocks For Spring

By Zacks Investment ResearchStock MarketsMar 28, 2014 05:46AM ET
3 Best Bargain Stocks For Spring
By Zacks Investment Research   |  Mar 28, 2014 05:46AM ET
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Despite recent stock weakness, the major indices still trade within just a few percentage points of their all time high.

With valuations stretched, it's been hard to find bargain stocks.

But for those investors interested in value and solid fundamentals, there are still a few hidden gems out there. You just have to know how to find them.

Use the Zacks Rank to Find the Hidden Gems

I screened for companies with a Zacks Rank #1 (Strong Buy) or #2 (Buy) recommendation. These are companies that have rising earnings estimates. Rising earnings estimates usually indicates that analysts believe that there's something good going on with the company in the next 1 to 3 months that warrant a more optimistic view on earnings.

With so many companies complaining about the weather dampening sales or a sluggish consumer, I wanted to find companies that aren't using these excuses.

I also looked for companies with a forward P/E under 15.

This may not seem that cheap to those of you who routinely seek out value. Some value investors only consider a P/E under 10 to be a bargain. But with the average forward P/E of the S&P 500 at 15.8, I still consider companies trading below that to be a bargain.

Value AND Growth

My screen came up with quite a few bargain stocks which met my criteria. I was therefore able to narrow it down by looking for some of my other favorite criteria including growth.

Why not get a bargain stock which is also growing? That's the best of both worlds.

I screened for companies expected to have double digit earnings growth in 2014.

Bargains DO exist. You just have to drill down deeper to find them.

3 Bargain Stocks for this Spring

1. Foot Locker, Inc.
2. Bally Technologies, Inc.
3. Phillips 66

1. Foot Locker Inc. (NYSE:FL)

Not all retailers are struggling. Foot Locker operates 3,473 specialty athletic apparel and shoe stores in 23 countries. It reported 2013 fourth quarter results on Mar 7 and saw comparable sales rise 5.3% during what was, for many, a difficult holiday season. Basketball shoes continued to be big sellers.

But even more impressively, Foot Locker said comparable sales for Q1 were trending up double digits. Who is doing that right now with polar vortices and a reluctant consumer?

Foot Locker also provided strong full year 2014 guidance. The analysts were gushing about the quarter and the company's outlook describing Foot Locker as one of the few retailers at the top of their game. Growth in basketball, women's and in Europe are expected to carry Foot Locker for the rest of the year.

Shares popped on the earnings report but still trade with an attractive forward P/E and other value metrics like price-to-sales and price-to-book.

Its P/S ratio is 1.0. A P/S ratio under 1.0 usually designates value so it's right on the edge. But it's price-to-book ratio is 2.7. A P/B ratio under 3.0 can mean a company is undervalued.

Forward P/E = 14.4
Earnings expected to grow 11.5% in fiscal 2014
Zacks Rank #2 (Buy)

Foot Locker
Foot Locker

2. Bally Technologies Inc. (BYI)

Bally is a well-known name in gaming. It produces gaming machines, table-game products, casino-management systems, interactive applications and networked and server-based systems for the gaming industry worldwide.

On Feb 6, it reported record Q2 quarterly revenue, helped by the acquisition of SHFL Entertainment in the quarter. Analysts like Bally's diverse business modle. Recurring revenue made up 51% of total revenue in the fiscal second quarter, a new quarterly record.

The gaming industry is facing tough industry conditions, but analysts still expect Bally to grow earnings 27% in fiscal 2014 and another 16.5% in fiscal 2015.

Shares have sunk since the earnings report in early February, providing a buying opportunity.

Forward P/E = 14.4
Earnings expected to grow 27% in fiscal 2014
Zacks Rank #2 (Buy)

Bally Technologies
Bally Technologies

3. Phillips 66 (NYSE:PSX)

Phillips 66 is one of the largest refining companies in the U.S. but it is also diverse with Midstream and Chemical segments. In 2013, refining made up 45% of earnings.

The company has been using its cash flow from refining to grow its more lucrative Midstream and Chemical segments. For now, earnings are still dependent on the ever changing crack spreads. Phillips 66 benefited in Q4 of 2013 from its Gulf Coast refining leverage.

Analysts are optimistic on the earnings outlook for 2014. 7 estimates have been raised for the year in the last 60 days. Earnings are expected to grow 26% in 2014.

Phillips 66 has all the value criteria, plus growth, which is a rare combination. In addition to a low forward P/E, it has a price-to-sales ratio of only 0.3 and a price-to-book ratio of 2.1.

Forward P/E = 10.4
Earnings expected to grow 26.5% in fiscal 2014
Zacks Rank #2 (Buy)

Phillips 66
Phillips 66

Bargains Are About Valuation

Finding bargain stocks is about researching fundamentals. It's NOT about the chart. Phillips 66 and Foot Locker shares have soared in the last year but both still have very attractive value fundamentals because their earnings are also rising.

Don't get faked out by the chart. A bargain is about a company trading for less than the overall market. All three of these companies are doing just that.

[In full disclosure, the author of this article owns shares in Phillips 66.]

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3 Best Bargain Stocks For Spring

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3 Best Bargain Stocks For Spring

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