Some experts are still saying shares are cheap, yet the economy continues to tank. But these 5 companies are still growing, and growing fast.
Investors today face a dilemma. Although the FTSE 100 is up over 40% from its March 2009 lows, many top investors like Anthony Bolton and Warren Buffett keep reminding us that shares are cheap.
On the other hand, every day we seem to have more bad news, whether that be rising unemployment or the government's massive budget deficit. It all leaves us wondering whether a stock market correction is just around the corner.
So if you think today is an utterly lousy time to invest, well, I certainly can't blame you.
That Pesky Internet Bubble
Do you remember the Internet bubble? I sure do. When that particular bubble burst in 2000, I saw my portfolio fall directly into the commode -- down 40% in the space of a few months.
See, back in 2000, I bought into the worst of the worst tech stocks. The overhyped lastminute.com float. The overpriced Arm Holdings (LSE: ARM) and Autonomy (LSE: AU). And I paid the price for my mistakes. But as the market slowly turned around, I eventually recovered my losses -- and then some.
Of course, the financial crisis and ensuing Great Recession we are facing today is far more widespread and threatening than the Internet bubble was. Nevertheless, over the course of time, I learned that building real wealth consists of three simple, timeless steps:
- earn as much as you possibly can;
- save as much as you possibly can from what you earn; and
- invest those savings.
Living below your financial means is a great way to save money. It means living in modest accommodation, driving an older car and forgoing designer labels. It also means maintaining your spending habits even as your income increases. That way, you can invest more and more money into the stock market.
You Invested In What?
I invested in companies that:
- had superb management;
- generated significant free cash flow;
- grew that cash flow quickly; and
- traded for cheap prices.
How low? To keep it simple, I like to see companies selling for a price-to-growth ratio (PEG) of less than 1.0. The PEG ratio was popularised by legendary investor Jim Slater.
Now Here's The Best Part
It was easy finding great companies that fit this criterion after the Internet bubble burst. But ever since 2005, I've been having trouble finding many shares selling for as cheap as I'd like to pay -- until recently.
Even after the recovery of the last 6 months, some shares still offer investors the chance to buy good companies on the cheap. Running one of my favourite share screeners in search of bargains, several likely suspects popped right up:
| Company | Share Price | Forward P/E | PEG |
|---|
| Immunodiagnostic Systems (LSE: IDH) | 405p | 13 | 0.30 |
| NCC Group (LSE: NCC) | 389p | 13 | 0.59 |
| Petrofac (LSE: PFC) | 932p | 13 | 0.43 |
| Healthcare Locums (LSE: HLO) | 259p | 10 | 0.30 |
| Research Now (LSE: RNOW) | 363p | 11 | 0.60 |
One Word Of Warning
Screens like this one can help you to find bargains, but they've got their limits as well. For example, Petrofac provides facilities to the oil and gas industry, and with most oil producers cutting back on expenditure, a company like Petrofac might face more than a few medium-term headwinds.
But by and large, shares that trade on low forward price to earnings ratios (P/E) and low PEGs are usually quite cheap. And still with so many available to choose from, the time to start looking is now.
If you'd like a little help with weeding out the false positives today, you might want to register your interest in Motley Fool's Champion Shares. Due to the imminent arrival of some big changes to our expert share-tipping service, for now we've closed our member list. But if you'd like to be informed when we announce these changes and to guarantee your exclusive invitation to join us when our doors re-open, simply click here.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com, and it was also published on Fool.co.uk on 25 March 2009. It has been updated.
> Bruce Jackson does not have a beneficial interest in any of the companies mentioned in this article.
