Cheap Stocks Are Scarce

 | Feb 10, 2014 | 1:30 PM EST
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Finding undervalued securities is always a challenge.The task is even tougher against a rising market. I was going to name this column "Finding Dirt Cheap Stocks" but the reality is that there are really no dirt cheap securities today. Simply finding cheap stocks is posing more and more of a challenge.  

One important reference point: I use the word "cheap" and "undervalued" to mean the same thing. Cheap has nothing to do with price. There are hundreds of stocks available today trading for less than $10 or $5 with little-to-no business value. There are names like Berkshire Hathaway or Apple that trade for high absolute prices, but command solid value.

American Axle & Manufacturing (AXL) looks like a viable candidate. Earnings growth is expected to surge to more than $3 in two to three years from $1.50 per share in 2013. For 2014, earnings per share are expected to reach $2.50. At $19 a share, that gives the company a forward price-to-earnings ratio of less than 7. Long-term debt of $1.4 billion is what caused shares to plunge to 30 cents during the Great Recession, but this maker of driveline systems for trucks and SUV's should be a strong winner from the continued strength in US auto sales.  

Weight Watchers (WTW) promotes weight loss programs. Unfortunately, their shares are shrinking also.Trading at 10x forward earnings, the shares are being treated as if the company is a dying fad -- maybe it is. If not, then shares provide significant upside once the stigma wears off.

This is one of those businesses where the best research comes from careful observation. Do people you know continue to use it or its products? Shows like NBC's "The Biggest Loser" confirm to us that we live in a society where weight loss is still important for many -- in some cases a matter of life. Pay attention to this out-of-favor name.

BP (BP) offers what certainly appears to be a solid dividend and cheap stock.The company continues to cleanse itself of its past transgressions.The yield is 4.8%. Against an enterprise value of $175 billion, the company generates over $20 billion in operating cash flow. Capital expenditures have been quite high the past several years due to fines and settlements, but the dividend has remained.

If the above names don't sound appealing or cheap enough, that may be precisely the point. It is slim pickings out there and time to get realistic and forget about 2013. It's better to sit still and be ready to pounce than to make undisciplined bets trying to chase performance.

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