The time for bargain hunting in the virus-afflicted stock market may not have come yet. But it will come.
Guessing when we have hit bottom will be an art, not a science. It will be partly a matter of judgment and feel.
When you are ready to wade back into the stock-market water, you may find some of the best bargains among lesser-known stocks. Many of these trade on Nasdaq (the National Association of Securities Dealers Automated Quotations system).
Nasdaq is the world's second-largest stock market (after the New York Stock Exchange). Although it's home to several huge technology companies, Nasdaq also houses close to 3,000 smaller companies - and that's where at this moment I see a few bargains.
As of Friday, March 13, the Nasdaq Composite Index was down 19.8% from its peak. Yet I can't say that it looks cheap...yet. But while Nasdaq as a whole doesn't look to me like a bargain, here are a few stocks that do.
Based in Racine, Wisconsin, Johnson Outdoors Inc. (NASDAQ:JOUT) makes fishing equipment and other outdoor gear.
Fishing may not strike you as a growth industry, but Johnson's growth is creditable - about six percent revenue growth over the past five years, with book value (corporate net worth per share) and profits growing considerably faster.
The stock trades for less than 11 times the past four quarters' earnings and just under 1.0 times sales. Those are my kinds of multiples. I also like Johnson's balance sheet. Debt is modest, and cash is three times debt.
Furniture manufacturer Kimball International Inc. (NASDAQ:KBAL) has improved its profitability by focusing exclusively on furniture for offices and hotels. Its return on stockholders' equity was 19% in the past four quarters, and has been above 18% for three years running.
So far as I can tell, no Wall Street analysts follow this small-cap stock. Analytical neglect is no guarantee of profits, but academic studies suggest that it's a plus.
Known best as a builder of starter homes, LGI Homes Inc. (NASDAQ:LGIH) keeps prices down by building out in the boondocks, and by using a limited number of construction plans.
Currently, millennials prefer urban living, which usually means apartment living. But as they have children, I think many millennials will want single-family homes, which bodes well for LGI.
The stock sells for 14 times earnings, which strikes me as inexpensive considering that revenue and earnings have grown at more than a 30% annual pace for the past five years.
Home buyers generally find title insurance to be a necessary evil. But evil or not, it is necessary.
One title insurer that looks attractive to me now is Investors Title Co. (NASDAQ:ITIC) of Chapel Hill, North Carolina. Over the past 10 years, it has sold on average for about 14 times earnings. Today the multiple is eight.
No one likes bank stocks these days, because ultra-low interest rates are bad for bank profits. When rates scrape the bottom, it's hard for banks to earn a big spread between what they pay for deposits and what they make on loans.
Nonetheless, I think Exchange Bank of Santa Rosa (EXSR) looks good. The company is debt free. The stock trades for less than book value, and less than six times earnings.
Over the past decade, its earnings and profitability have gradually accelerated. Last year it earned 1.47% on assets. A figure above 1.00% is usually considered good for a bank.
This is the 14th column I've written recommending selected Nasdaq stocks. On the first 13, my average 12-month return has been 14.2%. That compared with 9.9% for the Standard & Poor's 500 Index and 13.6% for the Nasdaq Composite Index.
My picks from a year ago scored a 3.9% return, beating the S&P 500 (which lost 3.2%) but trailing the Nasdaq Composite (at 5.3%). Apple Inc. (NASDAQ:AAPL) was my best pick, up 48%. Apogee Industries Inc. (NASDAQ:APOG) was the worst, down 40%.
Bear in mind that my column recommendations are theoretical and don't reflect actual trades, trading costs or taxes. Their results shouldn't be confused with the performance of portfolios I manage for clients. And past performance doesn't predict future results.
If you want to buy any of the stocks I discussed today, I'm with you. But with the markets so unsettled, I suggest moving in gradually, buying no more than half of your ultimate position in your first round of trading.
Disclosure: I own Apple shares personally and for most of my clients.
John Dorfman is chairman of Dorfman Value Investments LLC in Newton Upper Falls, Massachusetts, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at email@example.com.
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This article first appeared on GuruFocus.