Value Investors Experience Shortness Of Breadth
Investors tend to prize assets in short supply. Given that the S&P 1500 Index has surged 141% since the end of 2008, stocks with truly low valuations are scarce.
S&P 1500 Index stocks average trailing P/E ratios of 22.5, up from 22 last October and above the 10-year average of 21. Just 33% of S&P 1500 stocks currently trade below their five-year median P/E ratios, with just 21% at more than a 10% discount.
Trailing P/E ratios creep higher
|Stocks in the S&P 1500 Index average trailing P/E ratios of 22.5, above their 10-year average of 21. Rising valuations leave few stocks cheap relative to their own historical norms. Just 33% of S&P 1500 stocks trade below their five-year median trailing P/E ratios — and just 21% offer more than a 10% discount. The consumer-discretionary sector offers a well-stocked pool of bargains, with 58% of stocks below their five-year median P/Es. Good deals are tougher to find in energy and utilities.
The last few years have presented a rough stretch for value investors. Value metrics rank among the most-effective factors in Quadrix over the past decade, as shown in the table below. But with the exception of dividend yield, they have underperformed over the past 12 and 36 months. Encouragingly, we have begun to see Value factors such as P/E, P/E on next year's estimate, and price/cash flow perform better in the past three months.
It's too early to tell whether the rebound in value since June 30 represents the beginning of a long-term trend — whether these stocks in short supply will attract higher demand. In the table below, we identify stocks that look attractive from all angles: cheap versus the broad market, versus peers, and versus their own history. They also score well in Quadrix, based on several of the top Value factors for the past decade. Four of our favorites are reviewed in the following paragraphs.
AbbVie ($61; ABBV) shares have returned 6% this year, shrugging off concerns about potential competition to blockbuster drug Humira (61% of AbbVie's sales for the 12 months ended June). The U.S. has cleared Amgen ($164; AMGN) to launch a biosimilar version of Humira, while Johnson & Johnson ($118; JNJ) says its experimental psoriasis drug outperformed Humira in a final-stage study. Faced with the prospect of losing exclusivity for its biggest product, AbbVie has made a series of acquisitions to bolster growth. Encouragingly profit estimates for both 2016 and 2017 have risen over the last 90 days, now projecting double-digit growth in both years.
Yielding 3.7%, AbbVie earns a score of 85 in Quadrix for dividend yield, one of the most effective factors in the past year. The stock also scores above 80 for two Quadrix factors not currently working, but which have been highly effective over the past decade: P/E on next-year estimate and P/E on next-year estimate relative to three-year median. AbbVie is a Long-Term Buy.
Citrix Systems' ($83; CTXS) operating momentum has outpaced the stock's 12% advance in the past year. For the 12 months ended June, per-share profits surged 71% for Citrix, a designer of desktop-virtualization products that let workers remotely connect to data devices. Both operating cash flow and free cash flow have risen by double-digits in four consecutive quarters.
Citrix shares trade at 16 times trailing earnings, their lowest level in more than a decade. Analyst profit estimates have drifted higher since management raised its 2016 guidance in July. For the September quarter, the consensus expects Citrix to report earnings per share of $1.19, up 14% on 2% revenue growth. Scheduled to post results on Oct. 19, Citrix is a Focus List Buy and a Long-Term Buy.Â Â Â
Kroger ($31; KR), like other grocers, has seen prices for many food items steadily decline throughout the year. But despite the difficult environment, Kroger has still managed to grow its market share, as evidenced by higher food volumes and rising store traffic. Kroger's per-share profits and operating cash flow rose 10% in the first half of fiscal 2017 ending January on 4% higher revenue. Pricing among grocery retailers has remained rational, easing concerns about a price war.
Yet Kroger shares haven't gotten any credit for management's strong execution. The stock has slumped 15% since the end of June and now looks abnormally cheap relative to its own history and other stocks. In Quadrix, Kroger earns a Value rank of 91, up from 42 at the end of 2015, and scores 80 or higher for trailing P/E, price/sales, and price/cash flow ratios. Kroger is a Buy and a Long-Term Buy.
At 15 times trailing earnings, Owens Corning ($53; OC) shares trade near their lowest valuation since 2012. Owens' trailing P/E and estimated current-year P/E ratios offer at least a 27% discount to the median S&P 1500 stock in the building-products industry. The stock also earns above-average scores for more than 80% of factors that comprise the Quadrix Value score.
Owens is the rare value stock that also looks timely based on its surging operating momentum and earnings estimates. Cash from operations has climbed in seven of the past eight quarters, including 15% growth in the June quarter. Sales jumped 10% in the June quarter, marking the fifth straight quarter of growth. The 2017 target has risen sharply over the past 90 days, with the consensus calling for 8% growth. The stock scores 80 or higher for Momentum, Value, and Earnings Estimates — the same can be said for just 13 stocks in the S&P 1500 Index. Owens is a Focus List Buy and a Long-Term Buy.