Finding Value in a Pricey Market

After a yearlong rally that has carried the entire stock market higher, finding value is harder than ever.

But it's not impossible. In fact, some companies continue to look attractive even after a huge run-up in share price.

Consider restaurant owner Landry's ( LNY), specialty retailer Finish Line ( FINL) and auto-parts supplier Magna International ( MGA).

Landry's, which operates the Landry's Seafood House, Joe's Crab Shack and Chart House chains, has surged 90% over the past year, but the stock continues to trade at under 19 times trailing earnings and 0.7 times sales.

That looks like a bargain when you reflect on the company's track record. Earnings per share have grown 65% on a five-year annualized basis while sales have increased by 24%. Both of these metrics are well above the industry average. What's more, the company has very little debt, a low price-to-book value, and pays a small dividend of 10 cents a share.

Analysts are mostly positive on the company, and recently praised its strong fourth-quarter results, which included an 11% jump in revenue and a big improvement in operating margins.

Thomas Weisel analyst Skip Carpenter said Landry's Restaurants offers "an extraordinary competitive advantage in the casual dining segment."

The company, which operates 286 restaurants, plans to open 20 to 22 more this year, of which eight to 10 will be Joe's Crab Shacks -- the firm's main revenue driver.

"Landry's competitive position along with favorable sector fundamentals will allow the company to achieve 12% to 15% long-term earnings growth," Carpenter said.

Analysts surveyed by Thomson One Analytics expect the firm to earn $1.93 a share this year, up from an operating profit of $1.77 last year.

Like Landry's, Finish Line, which sells athletic apparel, has been on a tear over the last year, surging 198%. But the stock might not be done yet. Despite the climb, the company trades at under 21 times trailing earnings and less than one times sales.

Over the past five years, the firm has increased sales by 10% annually while earnings have climbed 15%, and the outlook appears to be bright, too. The company said on Thursday that same-store sales grew 19% in the fiscal fourth quarter and it raised earnings estimates for the fourth quarter ended February, as well as for fiscal 2004 and 2005.

"FINL shares have risen sharply over the last year but in our opinion have not achieved the full recognition deserved," said Oppenheimer analyst Bernard Sosnick. "Specialty apparel retailers in malls that have produced anywhere close to FINL's results have typically sold for richer multiples than the 15 times accorded to FINL."

Sosnick was referring to Finish Line's valuation based on forward earnings estimates. The company's management recently said it is in the strongest competitive position in its history and predicted continued growth in same-store sales.

Banc of America analyst Robert Ohmes is also optimistic and recently raised his price target on Finish Line, saying there is potential for further earnings upside "with the help of accelerating square footage growth and opportunities for further operating margin expansion."

Still, some analysts worry that same-store sales comparisons will become more difficult this year, which could hurt the stock going forward.

Magna International is another interesting value play right now, trading at just 13 times trailing earnings and 0.5 times sales.

The firm, which makes and sells auto parts, has seen sales grow an annualized 28% over the past five years while earnings per share have jumped 21%. The company also has a dividend yield of 1.73%.

While earnings missed analysts' expectations in the most recent quarter, thanks partly to a restructuring charge at one of its subsidiaries, the company said revenue rose 34% and it reiterated its sales forecast for 2004. Back in January, the firm said it anticipates a higher level of sales this year, "which is expected to contribute to earnings growth."

Although shares have climbed 73% over the past year, analysts are optimistic that Magna will show further improvement this year. One concern, however, is that the company is still searching for a chief executive to replace Belinda Stronach, who resigned in January to take up a political career in Canada.

While no stock is a sure thing and investors always should do their own research before buying, Magna, Finish Line and Landry's appear to be good bets, given their low valuations and outlook for growth this year. What's more, these firms are more shielded from some of the cyclicality plaguing other cheap stocks.

Title insurers Fidelity National Financial ( FNF) and First American Corp. ( FAF), for example, look attractive right now, as do homebuilders like Meritage Group ( MTH) and MDC Holdings ( MDC). But analysts expect a big fall-off in mortgage activity in 2004 and some are calling for higher interest rates later in the year, which could prevent stocks like these from rallying.

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