Thursday, August 26, 2010

7 Bargain Stocks You Can Feel Good About Now

By Elizabeth Ody / Kiplinger

A volatile market can be stressful for buy-and-hold investors but a blessing for opportunists. At its low in July, Standard & Poor’s 500-stock index had fallen 16% from its April high. Although the market has recovered a bit, plenty of high-quality stocks remain in the bargain bin. If you’ve been looking to capitalize on the market’s current funk, consider scooping up one or more of these names on days when the jittery market drags their prices down to even deeper discounts (share prices and related ratios are as of the August 19 close).

Paychex (symbol PAYX; $25.26)

The biggest worry for Paychex shareholders is that there will be little or no growth in demand for its payroll-processing services as long as the unemployment rate remains elevated. Paychex targets small businesses -- 99% of the firms it serves employ fewer than 100 people. But companies are typically reluctant to switch payroll providers, so Paychex has plenty of pricing power. That has helped the firm generate an average return on invested capital of 70% over the past ten years and average growth in free cash flow (the amount of cash profits left after the necessary capital outlays needed to maintain a business) of 14% annually over the past five years. Plus, Paychex has no long-term debt, says Jeff Auxier, manager of Auxier Focus Fund (AUXFX), which holds the stock. The shares, which are 21% off their late-March high, trade for 19 times estimated profits of $1.36 for the fiscal year that ends in May 2011 and yield a hefty 4.9%. (more)

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