Advertisement
Australia markets closed
  • ALL ORDS

    8,153.70
    +80.10 (+0.99%)
     
  • ASX 200

    7,896.90
    +77.30 (+0.99%)
     
  • AUD/USD

    0.6513
    -0.0005 (-0.07%)
     
  • OIL

    83.11
    -0.06 (-0.07%)
     
  • GOLD

    2,254.80
    +16.40 (+0.73%)
     
  • Bitcoin AUD

    108,180.28
    +1,311.51 (+1.23%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • AUD/EUR

    0.6041
    +0.0007 (+0.12%)
     
  • AUD/NZD

    1.0904
    +0.0002 (+0.01%)
     
  • NZX 50

    12,105.29
    +94.63 (+0.79%)
     
  • NASDAQ

    18,254.69
    -26.15 (-0.14%)
     
  • FTSE

    7,952.62
    +20.64 (+0.26%)
     
  • Dow Jones

    39,807.37
    +47.29 (+0.12%)
     
  • DAX

    18,492.49
    +15.40 (+0.08%)
     
  • Hang Seng

    16,541.42
    +148.58 (+0.91%)
     
  • NIKKEI 225

    40,321.34
    +153.27 (+0.38%)
     

Great Value Stocks for a Hot Market

Stock markets in the U.S. have been on a fantastic run since bottoming out during the financial crisis in March 2009. Today, the Standard & Poor's 500 index and Dow Jones industrial average sit at all-time highs and the Nasdaq Composite has drawn within 2 percent of its all-time high set in March 2000. In this environment of soaring prices, many investors are left to wonder if there is still any value left in this hot market.

In today`s article, we will use the principles of value investing to search for stocks that remain undervalued, in spite of current market conditions.

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. Today, we will look for companies matching the following value investing principles:

1. Find companies with 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.

ADVERTISEMENT

2. Favor companies with low debt. Debt becomes a drag on a company's earnings -- especially in the environment of increasing interest rates.

3. Prefer companies that pay a dividend and ideally have a strong track record of increasing their dividend payouts over time.

4. Find companies with consistent numbers of shares outstanding. Each time a company issues new shares, it dilutes the equity of existing shareholders. We wish to avoid companies that are constantly issuing new shares.

5. Most importantly, we wish to find companies that trade 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 said a company was fairly valued when its price-to-earnings ratio, or P/E ratio equaled its historic earnings per share, or EPS, growth rate. This definition makes intuitive sense, as we should be willing to pay more for a stock that 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.

What did we find? We will be using Recognia Value Analyzer to search for U.S.-traded stocks displaying good value investing characteristics, despite the current runup in equity prices.

Comcast Corp. It is the largest broadcasting and cable company in the world by revenue . Serving customers in 40 states, Comcast matches all of the classic value investing principles. The company has a 10-year EPS growth rate of 24.7 percent, pays a 1.54 percent-dividend and has a five year dividend-growth rate of 24.8 percent. The company's number of shares outstanding is declining as the company continues to aggressively buy back its own shares. Although the company's stock price is up about 15 percent in the past year, it still appears undervalued, based on its strong EPS growth rate.

Apple Inc. Despite being thought by many as a growth investment, this market darling also displays many of the characteristics of a good value investment. The company has a stellar 10-year track record of revenue and earnings growth and has been paying a dividend since 2012 -- now sitting at a 1.45 percent yield. Despite a one year price runup of 72 percent, Apple still appears undervalued with a current P/E ratio of 17 and a 10-year EPS growth rate approaching 40 percent.

NewMarket Corp. This company provides additives for the petroleum industry and has annual revenue surpassing $2 billion. The company's stock has had a fantastic year -- up over 30 percent in the past 12 months. It currently pays a 1.2 percent dividend and has had a declining number of shares outstanding since 2006. The company currently appears undervalued with a current P/E ratio of 25.5 and a 10-year EPS growth rate of 27.8 percent. On Jan. 29, the company announced fourth-quarter results which beat analyst estimates in terms of earnings but missed slightly in terms of revenue.

Steve Madden Ltd. The footwear company also displays many of the value-investing characteristics we are seeking. Although it does not pay a dividend, the company has no debt and has growing cash on hand. The company has a current P/E ratio of 17.5 compared to a 10-year EPS growth rate of 26 percent, which classifies it as undervalued. The stock's price has move basically sideways for the past year. However, with tailwinds such as declining gasoline prices boosting retailers, the company may have a better year in 2015.

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.

Peter Ashton is the vice president of retail and self-directed investing for Recognia, the industry leader in providing global retail investors with actionable insights to make confident trading decisions. Ashton is directly responsible for empowering the trading community of over 20 million investors to which Recognia is provisioned by ensuring all aspects of the company's client service delivery, including the distribution of in-depth investment research culled from Recognia's patented investing analytics.



More From US News & World Report