Since the election in early November, stocks have surged ahead with the Standard & Poor’s 500 index shooting up 12.8 percent and the Dow Jones industrial average up 14.6 percent. Last Wednesday’s Federal Reserve decision to begin winding down its $4.5 trillion balance sheet has spurred further bullish sentiment among investors. With U.S. stock markets now at or near all-time highs, is there still good value to be found?
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.
[See: 9 Ways to Buy Stocks That Everyone Needs.]
The screen: We used the Recognia Value Analyzer to look for companies matching the following 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.
— Companies that pay a dividend and ideally have a strong track record of increasing their dividend payouts over time.
— Consistent numbers of shares outstanding. Each time a company issues new shares, it dilutes the equity of existing shareholders. This analysis will avoid companies that are constantly issuing new shares.
— Companies that trade below their fair value. Fair value is a concept with many definitions. One methodology is to look for stocks whose price-earnings ratio is equal or less than its historic EPS growth rate. This definition makes intuitive sense as investors 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.
[See: How to Invest in Esports: 7 Winning Stocks.]
McKesson Corp. (ticker: MCK). This San Francisco-based company is a great example of a value stock with a growing dividend, low debt and long track record of growing revenue and earnings. McKesson specializes in health information technology, medical supplies and care management tools. McKesson’s stock price faltered in mid-2016 as uncertainty about the U.S. election led to a decline in many health care stocks. However, the stock price has rallied in 2017 especially in the past two weeks. On May 18, McKesson announce fourth-quarter results which beat analysts’ estimates for earnings by a wide margin. The stock responded by shooting higher almost 15 percent.
Tanger Factory Outlet Centers (SKT). A real-estate investment trust, SKT also makes the list based on long-term, consistent revenue growth and advancing dividend yield. Tanger’s stock price was hit hard in the past 12 months (down 25 percent) due mainly to pressure on the REIT sector caused by expectations of increasing interest rates. At the same time, struggles by big name retailers like Sears and Macy’s have created a malaise over the entire retail sector. Tanger is now trading at less than its fair value for the first time in 10 years.
Bank of the Ozarks (OZRK). The financial services sector currently has a large number of companies making the value screen. One of the most interesting is this regional player. The company currently has more than 250 locations, mainly in Arkansas, Texas, Georgia and North and South Carolina. Like many companies in the banking space, Bank of the Ozarks stock shot up following the election on hopes of decreased regulation and increasing interest rates. Tempered optimism about the rate at which interest rates will rise has caused some pullback in the company stock price in recent months with the stock now trading about 20 percent off its 52-week highs.
[See: 10 Ways for Investors to Buy the Market.]
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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3 Great Value Stocks for a Hot Market originally appeared on usnews.com
