5 stocks at deep discounts

On the rebound, these shares could fare best.

By TheStreet Staff Sep 1, 2010 12:34PM

Sale © Image Source/CorbisBy Jake Lynch, TheStreet

 

U.S. stocks slid last month, with the S&P 500 ($INX) falling 4.7% as investors loaded up on fixed-income securities.


Here are some stocks that are struggling despite exceptionally low price-to-earnings ratios. When stocks rebound, these shares could  fare best.


The companies are ordered from cheap to cheapest.

 

5. Humana (HUM) offers health and supplemental benefit plans. Second-quarter profit increased 21% to $340 million, or $2 a share, as revenue grew 9.5% to $8.7 billion. The operating margin rose from 5.9% to 8.2%.

Humana has $8.9 billion in cash and $1.7 billion in debt, equal to a quick ratio of 1.7 and a debt-to-equity ratio of 0.3. During the past three years, Humana has grown revenue 11% annually, on average, and boosted profit 24% a year.

 

Its stock trades at a trailing earnings multiple of 7.1, a forward earnings multiple of 8.6, a book value multiple of 1.3, a sales multiple of 0.3 and a cash flow multiple of 3.6 -- 51%, 31%, 48%, 60% and 59% discounts to peer averages. Of analysts covering Humana, 9, or 43%, advise purchasing its shares, 11 recommend holding and one suggests selling them. A median price target of $55.73 suggests a return of 16%.

 

4. Goldman Sachs (GS) is a global full-service investment bank. Second-quarter profit tumbled 82% to $613 million, or 78 cents a share, as revenue decreased 31% to $10 billion. The operating margin narrowed from 42% to 40%. Goldman Sachs has $258 billion in cash and $540 billion in debt, equal to an elevated debt-to-equity ratio of 7.3. Since 2007, Goldman has increased net income 5.9% a year, though earnings per share fell 2.6% a year.

 

Its stock sells for a trailing earnings multiple of 7.2, a forward earnings multiple of 7.7, a book value multiple of 1, a sales multiple of 1.5 and a cash flow multiple of 2.1 -- 46%, 45%, 35%, 31% and 85% discounts to capital markets industry averages. Of researchers following Goldman, 24, or 86%, rate its stock "buy" and four rate it "hold." None rank it "sell." A median target of $189.79 implies 39% of upside. Deutsche Bank (DB) offers a price target of $205.

 

3. SLM Corp. (SLM) provides education finance in the U.S. SLM swung to a second-quarter profit of $338 million, or 63 cents a share, from a loss of $123 million, or 31 cents, a year earlier. Revenue gained 13%. The operating margin narrowed from 61% to 57%. SLM Corp. holds $13 billion in cash and $199 billion in debt, equal to an excessive debt-to-equity ratio of 39. During the past three years, SLM's net income has dropped 8.5% a year, on average.

 

Its stock trades at a trailing earnings ratio of 5.4, a forward earnings multiple of 7.7, a book value multiple of 1.1 and a sales multiple of 0.8 -- 58%, 37%, 51% and 43% discounts to consumer finance industry averages. Of analysts evaluating SLM Corp., six, or 60%, rate its stock "buy" and four rate it "hold." None rank it "sell." A median target of $15.50 suggests a potential return of 40%. FBR (FBCM) offers a price target of $19, implying 71% of upside.

 

2. Coventry Health Care (CVH) is a managed health care company. Its second-quarter profit plummeted 95% to $1 million, or 1 cent per share, as revenue fell 18% to $2.9 billion. The operating margin extended from 2.9% to 9.9%. Coventry has $1.5 billion in cash and $1.6 billion in debt, converting to a quick ratio of 1 and a debt-to-equity ratio of 0.4. Since 2007, Coventry has grown sales 14% annually, on average, as net profit dropped 22% a year.

 

Its stock sells for a trailing earnings multiple of 9.5, a forward earnings multiple of 7.7, a book value multiple of 0.8, a sales multiple of 0.2 and a cash flow multiple of 8.6 -- 35%, 38%, 68%, 63% and 2% discounts to health care peer averages. Of researchers covering Coventry, six, or 32%, advocate purchasing its shares and 13 recommend holding them. A median price target of $25.64 suggests a return of 31%. BMO(BMO) offers a price target of $33.

 

1. Ace (ACE) provides a range of insurance and reinsurance products. Second-quarter profit expanded 27% to $677 million, or $1.98 a share, as revenue increased 6% to $3.8 billion. The operating margin widened from 19% to 23%. Ace has $5 billion in cash and $3.6 billion in debt, equal to a debt-to-equity ratio of 0.2. Since 2007, Ace has grown sales 4.1% a year, on average, increased net income 3.6% a year and boosted earnings per share 3% a year.

 

Its stock trades at a trailing earnings multiple of 6.3, a forward earnings multiple of 7.3, a book value multiple of 0.9, a sales multiple of 1.2 and a cash flow multiple of 4.9 -- 58%, 27%, 80%, 76% and 44% discounts to insurance industry averages. Of analysts covering Ace, 21, or 88%, rate its stock "buy" and three rate it "hold." None rank it "sell." A median target of $65.98 implies 24% of upside. JPMorgan (JPM) forecasts that the stock will rise 37% to $73.

 

For more discounted stocks, visit TheStreet

 

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