4 Undervalued Stocks With Good Growth And Buy Ratings

For years, investors have debated whether higher returns are achieved by investing in growth or investing in value. But what if there is a way to get the best of both worlds?

Finding Undervalued Stocks

To find undervalued stocks, the Price/Book (P/B) and Price/Sales (P/S) ratios are better and more consistent indicators.

• The P/S ratio reflects how many times over investors are paying for a each dollar of company's sales, and complements the Price/Earnings (P/E) ratio well.
• The Price/Book ratio, on the other hand, is not so consistent if used by itself. A low P/B ratio could either mean that the stock is clearly undervalued, or it could also mean that the company has fundamental problems.

Finding High Growth Stocks

To find high growth stocks, look at EPS trends over a period of time, such as Forward EPS Long-Term Growth (3-5 years) and EPS growth in the past year, as well as the next year. If these EPS trends are better than the overall market, it is less likely that the company is having fundamental problems.

Best of Both Worlds

To find highly undervalued stocks with good growth prospects, mix those two groups of indicators in your stock search, as it could be a mistake to rely on a single group for getting perspective on valuation.

Consider stocks with very low P/B (less than 2) and P/S ratios (less than 1.5), and with higher EPS trends of more than 15%. By using this method, you get the best of both worlds - undervalued stocks that have good EPS growth.

Icing on the cake - Analyst ratings

Apart from these indicators, take serious note of what the analysts are telling you about the company. First Call Recommendations are easily available on most investment brokerages or websites. Apply First Call consensus of Buy or Higher to the list of stocks that we get from applying the Value and Growth indicators.

Note: Investors may use other analyst ratings instead of First Call Recommendations, or a combination of multiple ratings to be sure of selecting best prospects.

Results

(1) Ashland Inc (ASH)

Ashland is a diversified global specialty chemical company that operates in segments such as Specialty Ingredients, Water Technologies, Performance Materials, and Consumer Markets.

• Price: $69.40
• 52-week range: $41.11 - $70.30
• Dividend Yield: 1.30%
• P/B: 1.27
• P/S: 0.71
• EPS Growth (Est. this Yr vs. Last Yr): 66.84%
• EPS Growth (Est. Next Yr vs. This Yr): 21.58%
• Forward EPS Long Term Growth (3-5 Yrs): 17.15%
• Risks: Sustained sluggish economy, high input costs.

(2) Lithia Motors Inc. (LAD)

Lithia sells new and used vehicles through it's dealerships in the western part of United States. The company is also involved in arranging finance, warranty and credit insurance contracts, and providing parts and service.

• Price: $24.92
• 52-week range: $13.57 - $27.99
• Dividend Yield: 1.60%
• P/B: 1.7
• P/S: 0.23
• EPS Growth (Est. this Yr vs. Last Yr): 26.35%
• EPS Growth (Est. Next Yr vs. This Yr): 10.29%
• Forward EPS Long Term Growth (3-5 Yrs): 21.13%
• Risks: Low vehicle demand and production, underperformance by Chrysler which is a main revenue contributor.