Monday, July 15, 2002

Nasdaq Bargain Hunting

Despite a 31% drop since the beginning of the year, it still may be premature to call a bottom for the Nasdaq Composite. The index managed to lose 5% last week and was off another 3.4% through midday on Monday. But, whatever the market's immediate direction, some Nasdaq stocks look pretty attractive.

We screened for Nasdaq-listed stocks that have held up well relative to the overall index but still look cheap relative to their estimated earnings growth potential.

Example: Clearwater, Fla.-based Lincare Holdings (nasdaq: LNCR - news - people ), the country's No. 2 provider of home respiratory services. The company delivers oxygen supplies to home-based patients suffering from such ailments as emphysema, chronic bronchitis and asthma.

Lincare, which has nearly 600 operating centers in 44 states, has been steadily increasing its share of the fragmented $4.5 billion home respiratory market through acquisitions and internal growth. In 2001, for example, the company acquired 18 smaller outfits, thus adding 15 operating centers to its roster.

Analysts reporting to Thomson Financial/IBES expect more such growth ahead for Lincare, forecasting that the company's revenue will increase to $958 million in 2002 and to $1.1 billion in 2003, from $812 million for its latest fiscal year (ended December).

As for earnings, analysts predict Lincare's profits will show annualized increases of 21% over the next three to five years. This means the stock, trading at just 17 times estimated next 12-month earnings of $1.76 per share, has a 12-month forward price-to-earnings growth (PEG) ratio of 0.8.

An investing rule of thumb says that stocks with PEGs less than 1 are undervalued. To assemble our table of Nasdaq picks, we started with stocks that carry low PEGs. For the group, 12-month forward price-to-earnings multiples average 17, while 2003 estimated P/Es average out at 14.

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