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Finding stock bargains
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February 5, 1998: 6:56 p.m. ET
Experts say investors can still find undervalued companies in the market
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NEW YORK (CNNfn) - Hunting for stock bargains might seem impossible in today's robust market, but some Wall Street pros insist there are dozens of undervalued gems out there waiting to be discovered.
Of course, the bulls of 1997 won't be leading the pack in 1998, market watchers say. You'll have to nose around in unexpected places.
"You look for undervalued stocks by looking at industries that have been overlooked," said Lou Ehrenkrantz, president of Ehrenkrantz King Nussbaum Inc., an investment management firm in New York.
Utility stocks, for example, were the low-priced darlings of Wall Street about six months ago, Ehrenkrantz said. After investors caught on, utilities had their best rally since 1959, he said.
Ehrenkrantz likes the railroad industry and the natural gas industry -- especially if the situation in Iraq keeps heating up. He mentioned Burlington Resources Inc. (BR), Sonat Inc. (SNT), Enron Corp. (ENE), Enron Oil & Gas Co., (EOG), and Rail Tex Inc. (RTEX), among others.
Peter Cardillo, director of research at Westfalia Investments Inc., an investment management firm in New York, is eyeing small-cap stocks for good value.
Small caps are outperforming their big brothers because they aren't exposed to currency risks in volatile global markets such as Asia, Cardillo said.
"As long as the economy doesn't go into a recession, I think these (smaller) companies will continue to outperform large-cap stocks," Cardillo said.
Cardillo is recommending Premier Laser Systems Inc. (PLSIA), U.S. Communications Inc. (USCM), Alpha Microsystems (ALMI), and Travel Ports of America Inc. (TPOA).
Cardillo isn't limiting his shopping list to U.S. stocks, either. Overseas, he's bullish on Beijing Yan Petroleum (BYH), which trades on the U.S. stock exchange.
The advantage of these stocks, Cardillo said, is you get revenue growth of up to 100 percent. The companies are trading at 15 to 10 times their earnings. Premium stocks, on the other hand, trade at 30 to 40 times their earnings.
Not everyone is giving up on the big boys, however. Ken Ducey, vice president and director of trading at B.T. Brokerage, a division of Bankers Trust in New York, sees good growth in some large cap stocks.
Companies like Intel Corp. (INTC) and Compaq Computer Corp. (CPQ) aren't overvalued if you look at where they're headed, Ducey said.
But the past three years have been stellar for large-cap stocks, and Ducey acknowledged there's not much room left for growth.
Lastly, keep in mind there are countless ways to calculate the potential superstars of the market.
Chris O'Donnell, portfolio manager at Elias Asset Management in Buffalo, N.Y. said he studies a company's cash flow over 10 years to make assumptions about future growth. While the average investor might look at price to earnings multiples, O'Donnell said there are too many ways for a company to skew its earnings.
"We identify the private market value of the business," O'Donnell said. If that value is higher than the level of trading, he'll buy shares.
The theory of "discounted cash flow analysis," is available to individual investors in books, O'Donnell said.
The method helped O'Donnell buy CBS Corp. (CBS) at 18. The stock closed Thursday at 30, and O'Donnell thinks it will go as high as 38.
He bought Allied Signal Inc. (ALD) when it was in the mid 30s, and the stock on Thursday closed at 41.
O'Donnell also likes General Electric Co. (GE) and American Express Co. (AXP).
"There are still good buys," O'Donnell said. "Our focus this year is not on any one particular sector or industry group …now, you have to pick the appropriate stock." 
-- By staff writer Martine Costello
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