What a difference does a year make for value investing practitioners!
When I ran this screen last year, I came up with 31 large cap stocks that offered a nice blend of earnings growth and good valuations. The same screen today returns a mere 2 stocks. So what has happened? Looking closer at the number of stocks different filters in this screen have removed, it appears that the biggest culprit is the expanding price to earnings multiples. This may be either because earnings have not grown much while the price continued to be elevated, or investors have bid up the price of the stocks to unsustainable levels.
Either way, if you primarily invest in large caps, I would recommend looking at smaller companies for capital gains in 2013. This also says to me that in 2013 we should probably not expect the market (S&P 500 index, for example) to post great returns and it will underperform 2012. I may turn out to be wrong if the GDP growth is red hot in 2013 but that is a risk I am willing to take
The screen itself was run to look for stocks with the following attributes:
- P/E under 15 but positive
- P/B under 1.5 but positive
- EPS growth in the Top 40% of its industry
- Expected EPS Growth > 15%
Coming back to the screen, the only 2 large cap stocks you should consider investing in 2013 are Corning and National Oilwell Varco. Let’s look at these 2 companies.
1. Corning (GLW):
|5 yr EPS Growth||2.58%|
A 160 year old company, Corning has reinvented itself more times in its history than any other company to keep itself relevant as the technologies evolve. The company today makes LCD displays for computers and televisions, optical fiber cables and equipment, emissions control products, and laboratory products. The stock pays a respectable 2.8% dividend and if you had bought the stock a year ago, your total returns would have been zero. The stock has underperformed lately as the demand for LCD panels appear to be declining (Large screen TVs), although smartphone market around the world has seen rapid growth. The key to keep in mind is that this market is quite oligopolistic with only a few major player (Corning, Asahi and NEG) and as such, producers have tremendous leverage that they can use if necessary. The valuations are very attractive and given that it has $4.3/share in cash on the books ($3B more than the total debt), the real multiple that the ongoing business sells for (taking the cash out 1 for 1) is only 6.65 times earnings.
Attractive? You decide!
2. National Oilwell Varco (NOV):
|Industry||Oil & Gas Equipment and Services|
|5 yr EPS Growth||4.47%|
Another ancient company, founded in 1862, National Oilwell Warco primarily manufactures and supplies equipment for oil drilling and production, onshore and offshore rigs, and covers products and services in all parts of the oil production and distribution supply chain. The company has grown its earnings this year by 15% while the stock has remained flat. Its earnings in the next 5 years are expected to grow a little better than the industry while the stock sells at a P/E ratio of 12, an almost 35% discount to the industry average P/E ratio.
Also keep in mind that it is now probably less a matter of “if” and more of “when” drilling in US goes full steam ahead. That will be a catalyst for most stocks in this sector, but more so for NOV dues to the steep discount it offers today compared to companies like Schlumberger (P/E=17).
Keep in mind that this is just 1 screen and there may be other great values to be found that are not uncovered in this screen. Review other screens as they are posted and do not forget to do your own due diligence before committing any capital to any of the stocks mentioned.