In its latest issue, Money magazine cited data showing stocks with the lowest earnings  multiples tend to post the highest returns. A chart in the article detailed that the l0% of stocks with the lowest price-to-earnings (P/E ) ratios returned almost 17% annually since 1963. In stark contrast, the 10% of stocks with the highest P/Es returned only about 7% and qualified as the worst-performing group.
Payroll processor and human resource business process outsourcing (HR BPO) firm Paychex (Nasdaq:PAYX) reported full-year results late last week that provided further evidence it has yet to see its business rebound from the credit crisis. Both business segments will need more robust employment trends to experience sustainable growth in the future, but when that may happen is highly uncertain. In the meantime, investors may find its above-average dividend yield appealing.
Software giant Oracle (Nasdaq:ORCL) posted solid sales and profit growth when it reported full year results last week. Its preferred method of growth has been through acquisitions, and the purchase of a large hardware rival in early 2010 boosted this year’s results. Shareholders have benefitted handsomely in recent years, but future stock returns could prove more challenging for the company.
Roughly a decade ago, specialty retailer Bed Bath & Beyond (Nasdaq:BBBY) could be counted on for posting steady annual sales and profit gains of more than 20%. Maturity at the main store concept means sales will likely return to these levels, but profit growth has seen an impressive revival due to several key factors.
Fast food has been one of the slowest industries to recover from the credit-fueled recession. Case in point, drive-in burger chain Sonic (Nasdaq:SONC) has seen flat sales for more than five years now, though its trends are also being masked by the intent to sell off company-owned locations. Its third quarter results reflected this shift in strategy. Its plans are to focus on a more lucrative franchise model, which should send profits firmly upward over the long haul.
At Berkshire Hathaway’s (NYSE: BRK-B ) annual meeting on April 30, Warren Buffett admitted to a lack of initial knowledge about the oil additive business shortly before agreeing to acquire Lubrizol Corp. (NYSE: LZ ). But as a quick study on companies and one of the most astute investors of all time, he quickly caught on to the appeal of Lubrizol’s business.
Posted: Jun 23, 2011 10:56 AM by Ryan C. Fuhrmann , CFA
Multimedia software provider Adobe Systems (Nasdaq:ADBE) reported some near-term sales challenges in Japan and parts of Europe during its second quarter, but managed to post impressive profit growth that came in ahead of analyst projections. The quarter demonstrated the appeal and scalability of Adobe’s business model, and growth trends going forward should accelerate on a number of product upgrades and the inability of rivals to eat into its graphic-design leadership position. (To learn more about earnings, check out Everything Investors Need To Know About Earnings.)
Despite major cutbacks to defense spending as a result of record federal debt levels, there are pockets of industry growth. Spending on combating cyber warfare remains on a secular uptrend, as does the advent of drones and other unmanned aircraft systems (UAS). AeroVironment, Inc. (Nasdaq:AVAV) is one of the only pure plays in the second category, and reported full-year results on Tuesday that demonstrated a solid sales growth trajectory. Unfortunately, this is one of the few positive aspects of the firm’s investment appeal.
Carnival Corporation (NYSE:CCL) (NYSE:CUK) reported strong sales and better-than-expected profit growth during its second quarter. However, pesky fuel costs continue to dent total profit growth, and this has been a common occurrence in recent years. Given where the stock is currently trading, Carnival’s investment appeal is questionable. (For more on the effect of fuel prices and oil, read Peak Oil: Problems And Possibilities.)
Investing in smaller companies can offer individual investors many important advantages. Perhaps the most important of all is that these companies can grow very quickly, since it doesn’t take much for new sales and profits to make a big impact on overall growth. Many stocks with small market capitalizations also fly under the radar of Wall Street. And because Wall Street mainly focuses on serving large institutions and other big-money investors who have billions of dollars to invest, small-cap investors have a higher likelihood of uncovering unique, profitable investment opportunities.
Book retailer and eReader provider Barnes & Noble (NYSE:BKS) closed the books on another difficult year as sales and profit levels disappointed investors. But with an existing bid on the company by a media conglomerate, a floor has been set on the share price for the time being. Shareholders are holding out hope for a higher competing bid, but may have to settle for the current buyout offer given the company’s uncertain outlook.
The opening headline from Research in Motion’s (Nasdaq:RIMM) first quarter financial release summed up the state of its difficult position in the hyper-competitive mobile phone market. It stated that it “plans to streamline operations and accelerate new product introductions” as consumers rapidly shift to Apple (Nasdaq:AAPL) iPhones and those that run on Google’s (Nasdaq:GOOG) Android operating system. Yet despite its current struggles, the low valuation leaves room for plenty of upside should management be able to turn around RIM’s operations.
Leading online Chinese financial portal provider China Finance Online (Nasdaq:JRJC) reported yet another difficult quarter of financial results. Near-term stock market weakness in China is pressuring sales, while the company appears to need more scale and customers to report consistent profits. As perhaps the leading online resource for Chinese investors and diversification into related businesses, its potential remains virtually unlimited, but few signs have emerged as to when this potential starts being realized.
Investment research platform provider FactSet (NYSE:FDS) reported another quarter of double-digit sales and profit growth, but total growth trends have been moderating in recent years. The firm’s operating performance has been enviable in a tough market for financial services, but investors expect continued rapid growth at the current share price valuation.
Communications service provider Black Box (Nasdaq:BBOX) recently closed out its fiscal year in strong fashion, as sales and profits grew in the double digits. Its future growth prospects look compelling, as it holds a small percentage of the overall market and clients have a need to upgrade their current systems. The current valuation is also appealing, though capital returns recently came in a bit low.
The yield on a 10-year Treasury bond  is hovering just below 3%. This means investors earn less than 3% for locking up their money in this security for a decade. Shorter-term rates are even stingier — a three-year Treasury yields only 0.70%, while a six-month Treasury yields about 0.08%, close to nothing.
Kroger (NYSE:KR) bills itself as the largest traditional grocery store retailer in the United States. It reported fiscal first quarter results on Thursday that included robust sales and profit growth, but the longer-term outlook will likely be much more subdued. The company has many positive investment attributes, but its modest overall growth is a major drawback.
Electronics retail giant Best Buy (NYSE:BBY) reported first-quarter results on Tuesday that saw sales come in ahead of analyst projections. Profits fell compared to last year’s first quarter, but also beat analyst expectations. Domestic sales continue to struggle, but the company is proving it has a number of ways to keep sales and earnings moving steadily forward.
Branded food marketer and manufacturer J.M. Smucker (NYSE:SJM) posted fourth quarter profits ahead of analyst projections late last week. As a result, its stock is bumping up against its highs over the past year. Longer-term, concerns exist over Smucker’s organic growth levels, and nearer term the company is fighting against higher commodity costs that form the basic ingredients for its coffee, jam and peanut butter brands.
Vail Resorts (NYSE:MTN) owns and operates a stable of the most appealing ski and lodging properties in the U.S. This asset base is extremely valuable, and provides the company a defensible business moat that competitors cannot replicate. But at the current share price, investors appear to be overestimating the profit-generating potential of these assets. (To help you determine the true value of a stock, check out Relative Valuation Of Stocks Can Be A Trap.)
Gambling product and service provide Shuffle Master (Nasdaq:SHFL) reported solid second quarter sales results last Wednesday. Profit trends were more subdued, but cash flow generation remains strong. Looking out over the longer haul, one of its divisions should continue to grow robustly in Asia while its other operating units will have to wait for an overall recovery in gaming across the world.
Shareholders are becoming increasingly frustrated with Microsoft’s share price performance, and it’s admittedly hard to blame them. Since the height of the dot-com bubble just over 11 years ago, Microsoft’s stock has lost half of its value as it traded at more than $50 back in March 2000.
This performance falls far shy of the overall market. Over the same period, the S&P 500 is down roughly 7% while the Nasdaq has fallen a still-dramatic 45%.
Casual dining restaurateur Bob Evans Farms Inc. (Nasdaq:BOBE) closed the door on its fiscal year on Tuesday, and though fourth-quarter profits fell below analyst projections, the market found management’s forward guidance much more appetizing. Despite the subsequent share price rally, the earnings valuation is still quite reasonable and will be more so if the company can hit the high end of its growth targets over the next five years.
Booz Allen Hamilton (NYSE:BAH) bills itself as a leading management and technology consulting service provider to the U.S. government. The government accounts for the vast majority of revenue and it wins more than half of the new contracts it bids on. The company went public in late 2010 at $17 per share and trades only slightly above its IPO price. Below is a further look at its business and an overview of its recent financial results.
Cascade Corp. (Nasdaq:CASC) is a niche player in the industrial sector, providing lifting materials for industrial lift trucks. Its customers operate all over the world and make Cascade somewhat of a bellwether for global economic activity. Judging by its first quarter results, this activity is coming in strong than expected. Although Cascade still has yet to recover to 2008 levels, it is on the right path for a full operational rebound. (For more on selecting stocks, read 4 Steps To Picking A Stock.)
Broadridge Financial Solutions (NYSE:BR) bills itself as the world’s largest processor of investor communications. This includes over 1 billion communications made annually, including sending proxy materials and related investor reporting. The business isn’t growing rapidly given the firm’s dominant market share, but the business is predictable and highly profitable.
Handbag and related accessory firm Vera Bradley (Nasdaq:VRA) reported first-quarter profits that disappointed investors on Wednesday. The stock fell dramatically as a result, but still trades at a rather lofty valuation. An expensive valuation won’t matter if its merchandise remains popular and continues to grow rapidly, but it’s difficult to predict if this will be the case. (For background reading, check out The 4 R’s Of Investing In Retail.)