Zacks Analyst Blog Highlights: Vale S.A., Gazprom, Dole Foods, Dillard’s and Ness Technology

Mar 21, 2011, 09:30 ET from Zacks Investment Research, Inc.

CHICAGO, March 21, 2011 /PRNewswire/ -- Zacks.com Analyst Blog features: Vale S.A. (NYSE: VALE), Gazprom (OTC: GZPFY), Dole Foods (NYSE: DOLE), Dillard's (NYSE: DDS) and Ness Technology (Nasdaq: NSTC).

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Here are highlights from Friday's Analyst Blog:

Find Inexpensive Strong Buys

Regular visitors to Zacks.com know that the single most powerful indicator of near-term performance is the Zacks rank. If you could buy all the Zacks #1 Ranked firms and then sell them as soon as they were no longer #1s, you would make a fortune before transactions costs. Your broker would also make a fortune after transactions costs.

A good discount online brokerage account helps in that regard, but it would also be nice to buy some good cheap stocks that you can hang onto for awhile. To actually invest -- rather than just trade and speculate.

Look Toward Valuation

Academic studies have shown over and over again that valuation matters. Over the long haul, cheap stocks do much better than expensive ones. Another way of thinking about it is, "How can I pick up very cheap companies at a time when they are poised for some great near-term performance?"

The two most common metrics of value are the P/E and the price-to-book value. How much are you laying out for the next year's earnings, and how much are you paying relative to the company's assets (minus its liabilities)? Both have been shown to be strong predictors of long-term performance.

But which one to go on? Well how about both? I used a very simple method to combine them: I multiplied. Each of the companies below has a product of their FY1 P/E and price-to-book that is less than 18. In other words, if the P/E based on 2011 earnings is 12, the price-to-book value has to be under 1.50. If the P/E is 6.0, then the P/B can go as high as 2.99.

EV/EBITDA

To narrow down the list, I also looked at a valuation measure that is a favorite of the private equity types, the enterprise value-to-EBITDA ratio. Enterprise value is the company's market capitalization plus its long-term debt, minus the cash on its balance sheet. That is the price you would have to pay to own the whole company (not including any takeover premium).

EBITDA is earnings before interest, taxes, depreciation and amortization over the last 12 months. In other words, how much cash is flowing into the company that would be available to service its debt if you decided to lever up the company to take it private.

I required that the EV/EBITDA ratio be below 10, or that the EBITDA yield was greater than 10%. With long-term risk-free rates (10-year T-note) at under 3.30%, that is ample margin for a LBO firm to be able to borrow cheaply enough for the company to be able to service, and pay down the debt taken on to buy the company.

My other two requirements were that the company have a Zacks #1 Rank, which puts it in the top 5% of all stocks in regard to estimate momentum, and that it have a market capitalization of more than $100 million.

What I find striking about the list of companies on it is how diversified a portfolio one creates this way. You want some exposure to basic materials, fine, there is Vale S.A. (NYSE: VALE), the world's largest producer of iron ore, and a major producer of other important metals. Energy?  Well how about Gazprom (OTC: GZPFY), one of the largest producers of natural gas in the world.

Maybe a nice boring food company like Dole Foods (NYSE: DOLE) would be a tasty addition to your portfolio. A retailer?  There is Dillard's (NYSE: DDS). You can also find a pair of shoe companies and some tech exposure as well, such as Ness Technology (Nasdaq: NSTC).

In other words, it is not just one type of company that is both cheap and has some estimate momentum behind it, but a broad spectrum of firms. Of course, as with any screen, this should only be a starting point for your analysis. If you want a nice combination of value and estimate momentum, this would be the right place to start.

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