Five Favorite Values

4/21/2014


With stocks up big, good values are hard to find.

The S&P 500 Index has fallen prey to its own success from 2013. As of April 15, the average stock traded at 20.0 times trailing earnings, 7% above the five-year average of 18.7. The smaller stocks in the S&P MidCap 400 and S&P SmallCap 600 indexes are similarly pricey relative to their history.

Our Focus List (up 7.8% so far this year) has performed better than the S&P 500 (down 0.3%), but as a group it offers a better value proposition. The 14 stocks on the Focus List average Quadrix Value scores of 69, well above the index average of 60. Our stocks average trailing price/earnings ratios of 16.8, 16% below the index average. And our stocks are slightly less expensive than average based on price/sales.

This week we took the value comparison a step further and screened among the elite stocks on our Focus List for the very best values. We required the stocks to trade at a discount to their sector and industry averages for price/earnings and price/sales, while also earning Value scores higher than the sector or industry average. Those five stocks are presented in the table below and reviewed in the following paragraphs.

Over the last year, DirecTV ($75; DTV) repurchased enough stock to reduce its share count 13%. Those buybacks deserve credit for leveraging a 7% sales gain into a 16% rise in per-share profits. Last year's repurchases were no fluke — since 2008, DirecTV has cut its share count in half.

DirecTV's lower share count has juiced per-share growth numbers in recent years, which could in turn skew price/earnings ratios and make the stock look cheaper than it truly is. But the satellite-TV provider also looks cheap based on price/sales, a ratio not affected by the share count. DirecTV trades at a discount of 39% to its industry average based on P/E and 29% based on P/S. The stock is a Focus List Buy and a Long-Term Buy.


Financial titan J.P. Morgan Chase ($55; JPM) earns a Quadrix Value score of 92, highest on the Focus List and second-highest among U.S. banks. The stock's P/E of 10 reflects discounts of 27% to the average S&P 1500 bank stock and 29% to its own five-year average.

In the March quarter, J.P. Morgan earned $1.28 per share, down 19% and 9% below the consensus on an 8% decline in revenue. Four of the financial giant's five operating units posted year-over-year profit declines. Not all the news was bad: Average deposits for consumer and business banking rose 9%, credit-card sales volume rose 10%, and the asset-management group posted its 20th consecutive quarter of positive long-term client flows. However, these positives couldn't offset industrywide weakness in the mortgage and trading businesses. CEO Jamie Dimon downplayed the weak operating results, focusing on how the bank no longer takes on excess risk to generate short-term profit gains. The 2014 profit estimate fell 5% in the three days after the company's quarterly announcement, but J.P. Morgan still trades at just 10 times that lowered target. Despite the short-term disappointment, J.P. Morgan seems to be making the right decisions, and for now the stock retains its Focus List Buy and Long-Term Buy ratings.


So far this year, Kroger ($44; KR) has managed a total return of 12%, dwarfing the average of 1% for the five grocery retailers in the S&P 1500 Index. Yet Kroger's Value score of 79 stands out in a consumer-staples sector averaging 54. Among the 10 market sectors, only technology looks more expensive. The stock's P/E of 16 is 28% below the sector average and 35% below the industry average.

In the year ended January, Kroger picked up 50 basis points (0.5%) of market share, according to Nielsen, gaining share in 16 of the 18 markets tested. In the January quarter, Kroger posted its 41st consecutive quarter of higher same-store sales. Nine consecutive annual declines in operating expenses as a percentage of sales suggests the company knows how to profitably manage its growth. Kroger is a Focus List Buy and a Long-Term Buy.


Auto-parts maker Lear ($81; LEA) earns a Value score of 84, well above the industry average of 57. It trades at least 29% below the industry median for trailing price/earnings, price/sales, price/operating cash flow, and price/book.

U.S. auto sales increased 7.6% to 15.5 million in 2013, and the Blue Chip Economic Indicators consensus projects a slowdown to 3.2% growth this year and 2.5% next year. However, foreign markets could make up much of the difference. As consumers in emerging economies become wealthier and their governments spend billions building roads and other infrastructure, automobiles move beyond their role as status symbols for the rich. In the four years ended 2013, sales in four of the largest emerging markets (China, India, Brazil, and Russia) combined to grow at an annualized rate of 20%. Lear is a Focus List Buy and a Long-Term Buy.


Trading at 13 times trailing earnings, 35% below the consumer-discretionary sector average and 34% below the auto-parts industry average, Magna International ($96; MGA) offers a compelling blend of value and growth. Over the last year, the Canadian company's per-share profits have jumped 35%, driven by 13% sales growth, a 4% decline in shares outstanding, and a rise in operating profit margins. The consensus projects per-share-profit growth of 10% this year and 17% next year, with estimates on the rise.

Operating cash flow has increased year-over-year in seven of the last eight quarters, rising 16% to $2.57 billion last year. Magna's robust cash flow should allow the company to continue boosting its dividend (up an annualized 15% over the last three years, including a 19% hike this year) and buying back shares ($1.61 billion spent on buybacks over the last four years, net of issuance). Magna is a Focus List Buy and a Long-Term Buy. 

OUR BEST VALUES
---- Trailing P/E Ratio ----
---- Price/Sales Ratio ----
--- Quadrix Value Score ---
Quadrix
Overall
Score
Company (Price; Ticker)
Company
Sector
Average
Industry
Average
Company
Sector
Average
Industry
Average
Company
Sector
Average
Industry
Average
Sector
Industry
Top 5 values
DirecTV Group
($75; DTV)
13.8
20.5
22.6
1.2
1.5
1.7
91
60
70
99
Discretion.
Cable TV
J.P. Morgan
($55; JPM)
9.6
21.8
13.2
2.0
3.5
2.5
92
59
82
70
Financials
Banks
Kroger ($44; KR)
15.6
21.7
23.2
0.2
2.1
0.9
79
54
60
90
Staples
Food retail
Lear ($81; LEA)
13.8
20.5
20.0
0.4
1.5
1.5
84
60
57
96
Discretion.
Auto parts
Magna Int'l
($96; MGA)
13.3
20.5
20.0
0.6
1.5
1.5
82
60
57
99
Discretion.
Auto parts
The rest of the Focus List
Cognizant
($49; CTSH)
22.4
22.3
22.6
3.4
2.8
1.7
55
52
61
95
Technology
Tech consult.
Google
($536; GOOG)
12.2
22.3
28.6
6.2
2.8
3.4
47
52
52
88
Technology
Internet
Helm. & Payne
($109; HP)
18.8
22.6
14.8
3.4
2.4
2.1
55
64
81
95
Energy
Drilling
Qualcomm
($79; QCOM)
18.7
22.3
22.2
5.3
2.8
2.2
69
52
57
96
Technology
Telecom
Schlumberger
($100; SLB)
20.9
22.6
22.3
2.9
2.4
1.8
68
64
65
83
Energy
Equipment
Union Pacific
($186; UNP)
19.7
21.4
19.8
3.9
1.6
3.3
55
59
61
94
Industrials
Railroads
United Rentals
($88; URI)
18.0
21.4
22.6
1.7
1.6
1.8
69
59
54
98
Industrials
Trading
Wells Fargo
($49; WFC)
12.4
21.8
13.2
2.9
3.5
2.5
81
59
82
96
Financials
Banks
Whiting Petro.
($73; WLL)
17.6
22.6
25.8
3.2
2.4
3.5
62
64
59
89
Energy
Exploration
S&P 500 Index
average
20.0
2.7
60
65
S&P 1500 Index
average
22.0
2.5
57
60
Note: Quadrix scores are percentile ranks, with 100 the best.

 


Delivering the goods

Have you ever wondered why we talk about our Focus List so often?

The answer is simple: It represents our best ideas for the year ahead, and history suggests our focused approach pays off.

Check out the table and charts below. So far this year, the Focus List has returned 7.8% versus a 0.3% decline for the S&P 500 Index excluding dividends and transaction costs. In fact, the Focus List has outperformed by a wide margin since its inception in 1994, as well as during shorter periods, such as:

• 2000 through the present, reflecting our handling of the 2000-2003 market slide.

• 2003 through the present, starting after the market's three-year decline at the beginning of the last decade.

• 2007 through the present, showing our de-emphasis of financials in advance of the ugly decline that began in 2007. We had a rough 2008, with several cheap energy, industrial, and materials stocks just getting cheaper as investors discounted a global depression that never happened. However, the Focus List bounced back in 2009 and 2010, topping the benchmark by a wide margin.

We started providing readers with a recommended cash position in 1998. Today we use the Vanguard Short-Term Corporate Bond Index ETF ($80; VCSH), a low-volatility exchange-traded fund, as a replacement for cash, which yields practically nothing. The fund yields 1.4%.

Although such a cash position tends to make us lag during up markets and outperform during down markets, over the long haul, market timing has enhanced our returns.


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