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Stocks: Powerful Profits on the Cheap

S&P's latest screen uncovers five names that combine strong margins with attractive valuations

From Standard & Poor's Equity ResearchDo you have to pay up for stocks with potent profitability? Nope. There are stocks that combine those two compelling qualities—strong margins and attractive valuations—and we've uncovered some in this week's screen.

Here's how we did it. We begin our search by looking for stocks with strong profitability. Specifically, we screened for issues in the highest 20% of the U.S. equity universe with regard to earnings yield (earnings per share divided by price per share) and gross profit margin.

Given the stock market's recent runup, we narrowed this list by searching for value stocks. We screened for stocks with price-to-earnings growth (PEG) ratios between 0 and 1. The lower the PEG ratio&basically, a measure of how much investors pay for earnings growth&the better.

We then added another value requirement. Each stock had to be ranked 5 under the Standard & Poor's proprietary Fair Value model, a quantitative stock ranking system. The model calculates a stock's weekly Fair Value—the price at which it should trade at current market levels—based on fundamental data such as corporate earnings and growth potential, return on equity, current yield relative to the S&P 500, and price-to-book value. Stocks are ranked from 5, indicating significant undervaluation compared with the Fair Value universe, to 1, indicating significant overvaluation.

To avoid speculative issues, we limited our output to stocks priced at above $5 per share and with market capitalizations of at least $500 million.

When we ran the numbers, five stocks made the cut.


Price (7/19/07)

Abercrombie & Fitch (ANF)


Ensco Intl (ESV)


First Marblehead (FMD)


Jos A Bank Clothiers (JOSB)


Viropharma Inc. (VPHM)


Kaye, a chartered financial analyst, is an analyst for Standard Poor's Portfolio Services.

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