ikkyu2 (99.46)

Turning over rocks

April 07, 2011 – Comments (5) | RELATED TICKERS: PLPC

I've recently put some money aside for more stock investing, and so in the last couple of weeks I've been doing what I call 'turning over rocks', looking for stocks that are underpriced for a reasonable prediction of their future growth.  I have been looking mostly at small caps.  Turning over rocks means I am reading the most recent few 10Qs and the last 10K, looking at the key stats here on CAPS and at Fidelity, reading an earnings call transcript or two, and trying to push a pencil to project and discount the next couple years of free cash flow with optimistic and pessimistic assumptions.

The last time I did this, I looked at more than 100 stocks, mostly large-caps.  I was not employed at the time, so I took my time and was as thorough as I wanted to be.  This time I've only looked at a couple dozen.  One main difference is that one of my favorite metrics, TTM P/E, is a very different metric in 2011 than it was in 2007, because the last twelve months include part of the recent recession; whereas in 2007 

I'm starting to get a similar feeling as I did then, though:

http://caps.fool.com/Blogs/calling-the-top/18429 

At that time I found "not one stock that was fairly priced for future growth."  I'm less certain of that here, but I sure did turn over some overpriced names.  One stock that I liked was PLPC, a stock that has ridden out the recession with positive earnings and which, if you look at its "return-on" metrics, is being managed fairly well.  On the other hand, it is acquiring other little companies like mad and can't hold onto cash.  I see it fairly priced here for continuing the same level of growth and return; if management stumbles, there is an acquisition problem, or a double dip recession that affects the companies' customers, there is no margin of safety.

I'm not quite ready to call a top like I did then.  Jobs, a lagging indicator, are starting to come back and that is a good sign.  I also still think that the Fed rate hike is coming in Oct or Nov; I think the market will probably (wrongly) view it as a positive sign.  I do think there are a few more shoes to drop in banking and housing.  In other words, if the market decided to overshoot fair valuation by 20% in the next 6 months, it would be normal behavior.

I'm still looking for a small cap name with a decent margin of safety.  Anyone got one to suggest?