Beauty is in the eye of the beholder. So are bargains. With the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) edging closer to breaking 6000, cheap stocks are harder to find. Yet just because a stock falls 10%, 20% or even 50% doesn't make it automatically a bargain.
For example, Woolworths Limited (ASX: WOW) is down close to 21% since last September. The retailer is just starting a $500 million cost-cutting program that could have lasting benefits down the road, but the market may get impatient. Big improvements in earnings may not come suddenly.
The share price rally from January quickly evaporated and Woolworths is back below $29. I like a discount just like when I go shopping at Woolworths, but I think investors can look forward to lower share prices before the retailer really begins to turn back up in business. The full year results will have a better picture of the progress, so it may be better to hold off on any big purchases of the retailer for now.
Sirtex Medical Limited (ASX: SRX) is another seeming bargain. The healthcare stock crashed earlier this month when disappointing clinical trial results for its specialised liver cancer treatment came out. Expectations turned out to be too high and investors fled for cover.
After recovering slightly from a fall of over 50%, the stock is still trading at 36 times forward earnings. Earlier analyst earnings growth forecasts based on clinical trial results being positive have to be ignored now. Investors should look at the company's business growth up to now to see if a $21.50 price tag is a bargain now. Recent half-year revenue and earnings were both up in the high double digits. Sirtex could maintain high growth rates for a number of years. The stock may not go much lower, but at today's price, there's still not a great margin of safety for value investors.
