If there ever was a stock that has gone nowhere, Benchmark Electronics, Inc. (NYSE:BHE) is the one. A quick look at its 10-year and one-year price histories shows that buy and hold investors of BHE have little to show for their investments.
Source: Morningstar
Source: Morningstar
At close to $24 per share, the technology manufacturer is currently trading at a 52-week high. If history is a guide, BHE is due for another 10% drop any day now. While the price levels are showing an interesting pattern, they do not provide any indication of whether BHE is a good long-term investment.
Contrarian Approach Stock Screen
As a value investor who focuses on fundamental ratios and financial statements, I implement quantitatively based systematic strategies.
The question for me is: Do current fundamentals indicate the stock will be a good long-term investment? My answer: Yes.
According to TheStockMarketBlueprint.com, BHE is currently the top ranked stock qualifying for the Contrarian Approach stock screen. This screen was influenced by David Dreman (Trades, Portfolio)'s book "Contrarian Investment Strategies."
Being the top ranked stock of the Contrarian Approach strategy means BHE has low price ratios and a solid balance sheet. The screen filters all U.S. listed equities for the following criteria:
- Market Cap > $1 billion
- Current Ratio > 2
- Debt/Equity > 0.5
It then ranks them from lowest to highest based on a combination of these price ratios:
- Price/Earnings
- Price/Book
- Price/FCF
Here's how BHE's fundamentals compare to the requirements:
- Market Cap: $1.17 billion
- Current Ratio: 4.05
- Debt/Equity: 0.17
- Price/Earnings: 14.42
- Price/Book: 0.89
- Price/FCF: 4.5
Top Ranked
If BHE is a profitable company with a padded balance sheet, why does it have the lowest combined price ratios of any stock qualifying for the screen?
First off, the size and financial criteria imposed by the screen are quite strict. Just these three requirements shrink the field of possible investments from nearly 20,000 to just a few hundred.
This is good because it ensures only stocks with the strongest financial conditions are considered for investment. The downside is thousands of "cheap" stocks are eliminated.
Without as many cheap stocks to compete with, a qualifying stock doesn't need drastically low price ratios in order to rank high. For example, while a P/E ratio of 14 or 15 is reasonably low, it's typically not a level where a stock would be considered strongly out-of-favor.
It's important to point out that BHE's reasonably low P/E ratio is combined with drastically low P/B and P/FCF ratios. The overall low valuation is no doubt due to BHE's inability to consistently grow earnings. In 2006, the company's EPS were $1.71. In 2015, they were $1.83. That's only 7% higher in nearly a decade.
Good Long-Term Investment
Based on the Contrarian Approach stock screen results, it's fair to say BHE is a solid long-term investment. The stock is priced relatively low compared to the rest of the market and its strong balance sheet offers investors many opportunities to unleash shareholder value.
