Since bottoming out on Feb. 11 on declining oil prices and fears of a Chinese recession, U.S. stocks have come roaring back. The Standard & Poor’s 500 index has rallied almost 13 percent from its 2016 low and the Dow Jones industrial average is up more than 13 percent.
Many stocks in the energy and materials sectors are now up more than 35 percent for the year. In light of the market’s strong performance in the past three months, are there still bargains to be found for value-conscious investors?
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Principles of value investing. Value investing as an investment discipline is not a set of hard-and-fast rules. Rather, it is a set of principles that have been laid down over time by some of the world’s greatest investors. We looked for companies matching these value investing principles:
- A long-term track record of growing revenue and earnings per share. Rather than being concerned with the last quarter’s earnings, value investors wish to invest in companies that have displayed a long-term (10 years or more) history of growing their businesses.
- Low debt. Debt becomes a drag on a company’s earnings – especially in the environment of increasing interest rates.
- A paid dividend, and ideally have a strong track record of increasing dividend payouts over time.
- Consistent numbers of shares outstanding. Each time a company issues new shares, it dilutes the equity of existing shareholders. We should avoid companies that are constantly issuing new shares.
- Trading below their fair value. Fair value is a concept with many definitions. In his book “One Up on Wall Street,” famed value investor Peter Lynch says a company was fairly valued when its price-earnings ratio equaled its historic EPS growth rate. This definition makes intuitive sense, as we should be willing to pay more for a stock which is enjoying a higher rate of earnings growth.
Although the above are by no means an all-inclusive shopping list for value investors, they do form a useful starting point to screen for good value stocks. We used the Recognia Value Analyzer to search for U.S.-traded stocks that displayed good value investing characteristics despite the current runup in equity prices.
BlackRock (ticker: BLK). The asset manager looks attractive based on its consistent revenue growth and 10-year EPS growth rate of 11.5 percent. The stock pays a 2.5 percent dividend and has a great track record of raising its dividend over time. As a major player in the U.S. and international ETF market, Blackrock seems poised for continued growth.
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Biogen (BIIB). Many pharmaceutical firms have sky-high earnings multiples today, but Biogen is an exception. BIIB stock looks relatively undervalued based on its P/E ratio of 18 and its long-term EPS growth rate of 19.6 percent. In mid-April, the company announced first-quarter results that beat analysts’ expectations for earnings by a wide margin and were up more than 25 percent from last year.
Priceline Group (PCLN). The online travel retailer is making headlines for an earnings miss in the first quarter, but PCLN has stunningly consistent revenue growth for the past 10 years and has a 10-year EPS growth rate of 24.6 percent. The stock does not pay a dividend but has good levels of cash on hand and a declining number of shares outstanding. Currently trading at about $1,345 per share, Value Analyzer sees a fair value in the neighborhood of $1,500, making the stock approximately 12 percent undervalued.
Bank of America Corp. (BAC). The North Carolina-based banking giant also makes our list despite running up almost 30 percent from its February lows. Bank of America is the second-largest U.S. bank by assets, with 12.6 percent of all the deposits in the U.S. BAC stock has a trailing P/E ratio of just 11 and has a 1.4 percent dividend yield.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia in respect of the investment in financial instruments. Investors should conduct further research before investing.