Jumat, 09 November 2018

The Four Best Value Stocks to Buy Now

Coming off one of the worst months in recent memory in the stock market, I ...

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The Four Best Value Stocks to Buy Now
By Nicholas Ward

Coming off one of the worst months in recent memory in the stock market, I thought it was important to hammer home the idea that the stock market should not be viewed as a singular entity, but instead a market of individual stocks.

This isn't a new premise. Value investors have been using it as the foundation of their strategy for as long as markets have existed. However, in this era when computers, algorithms, and exchange-traded funds (ETFs) drive so much of the trading, it's more important now than ever.

Why? Because automated trading often leads to indiscriminate buying and selling. The valuation of individual stocks is lost in the mix. This is especially the case during negative volatility when the proverbial babies are thrown out with the bath water.

As a value investor, I view it as my job to save those babies from drowning. Not because I'm self-righteous, but because of the long-term benefits of buying high quality equities at irrational discounts.

In an efficient market, short-term irrational thinking is eventually corrected. Stock prices rise and fall but the market is in constant pursuit of finding fair value. This is what leads to mean reversion.

This is an added benefit of buying stock in high-quality companies when they're undervalued. Not only do you get exposure to the improving fundamentals that propel prices higher over time, but in the short to medium term, it's likely that you'll receive an added bump from mean reversion.

Sure, deciphering fair value is no easy feat. I'd argue that it's more of an art than a science, with far too many data inputs for there to be a straightforward equation to find it. However, when it comes to mature, blue-chip companies, using history as a guide is a good place to start.

With that in mind, I will highlight a handful of companies that posted what were, in my estimation, fine earnings reports but sold off anyway. These companies are all trading at a significant discount to their long-term averages with forward-looking growth expectations in-line with historical performance, signaling an irrational gap in pricing.

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AT&T

AT&T (NYSE: T) just posted quarterly results whereby it grew revenues, earnings per share (EPS), and cash flows by double digits. However, concerns revolving around M&A, debt, and cord cutting have pushed the stock's valuation down to generational lows. AT&T is trading for less than 9x earnings while its long-term average price to earnings ratio is roughly 15x.

Source: F.A.S.T. Graphs

United Parcel Service

United Parcel Service (NYSE: UPS) just posted 7.9% revenue growth, in-line earnings growth, and raised its free cash flow guidance. This earnings report wasn't great, but I also don't think it should have sparked a sell-off in UPS shares. UPS's recent sell-off has driven its P/E multiple down to 15x. The company's long-term average P/E multiple is 22.5x. UPS hasn't traded for 15x earnings since 2011.

Source: F.A.S.T. Graphs

Caterpillar

Caterpillar (NYSE: CAT) recently beat on the top and bottom lines, posting 18.4% revenue growth. This is fantastic growth for such a mature company, yet the market sold off CAT shares and now they're trading for less than 12x earnings. Caterpillar's long-term average P/E ratio is 17x. Caterpillar hasn't traded this cheaply since 2013.

Source: F.A.S.T. Graphs

Northrop Grumman

One of the most impressive earnings reports that I saw this quarter came from Northrop Grumman (NYSE: NOC). The company had a big EPS beat and posted 23.1% sales growth. Northrop increased guidance and announced a share buyback. However, shares sold off. NOC shares are now trading in-line with their long-term average P/E multiple of 15x. I have a hard time believing that a company posting numbers like these deserves a sub-market multiple.

Source: F.A.S.T. Graphs

With all of this being said, I think it's important to echo the common risk-related mantra, "past results do not indicate future returns."

However, when it comes to high-quality blue-chip names, predictability is the name of the game. Sure, from time to time a well-known company is disrupted and the market was right to sell-off the stock. In my personal experience, though, I've found that more often than not, it's business as usual after a sell-off. A company doesn't become best-in-breed on accident.

Over time, blue-chips build competitive moats around themselves with the cash that their products and services generate. Cash attracts talent and talent produces results. This is why I'm more than happy to set fear and anxiety aside during market sell-offs and buy the dips in the blue-chip space.

An analyst with an uncanny knack for spotting investment value is my colleague Jim Fink, chief investment strategist of Options for Income. Jim's team recently put together a free tutorial that walks you through one of his live trades. This presentation demonstrates how you can collect $1,732.05 in under two minutes! Watch it by clicking here.

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