Only 2 Large Cap Stocks Make the Cut for 2013

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 Smile

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):

Industry Electronic Components
Market Value 18.7B
P/E 10.13
P/B 0.86
PEG 0.82
5 yr EPS Growth 2.58%
Dividend Yield 1.81%
ROE 9.5%
L/T Debt/Capital 0.13
Current Ratio 4.8

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
Market Value 28.6B
P/E 12.05
P/B 1.48
PEG 0.73
5 yr EPS Growth 4.47%
Dividend Yield 0.66%
ROE 12.2%
L/T Debt/Capital 0.06
Current Ratio 2.4

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.

Buffett owns 2.84 million shares of NOV.

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.

Comments

    • says

      Yes Ken. I am a little bemused about many media articles predicting 2013 to be a great year for stocks. There is a possibility this will happen as the money is now moving out of bond funds and into equities, but within equities the large stock investors will be disappointed.

      • Paul says

        With the fiscal cliff situation looming closer, it will probably mean a bear market if the fiscal cliff happens, meaning it’s possibly a great opportunity to buy stocks at great discounts to their intrinsic value. The stocks I bought up are fairly significantly since I bought them earlier in the year, but I’m gambling if I sell them before January 1, and the cliff takes place, I will be able to buy them in 2013 at a lower price than the original price. Of course, I could be wrong, since the fiscal cliff situation could be resolved between now and January 1. If that’s the case, I will just take my profits, and invest them somewhere else. I was thinking of investing in US REITs and MLPs as long-term investments as part of my portfolio, since they tend to pay better than the ones in my country. I can find them at a better price in terms of P/E and other metrics. The same applies for other sectors and industries. I might add some above-average paying dividend yield undervalued investments as part of my trading stocks, but these are the ones I want to hold on to long-term. If I can sell and rebuy at a lower price, I’m willing to do it, as long as I can make a profit or at worse, break even, before rebuying at a lower price. Interesting, since I was looking at GLW months ago on Seeking Alpha and NOV I looked at as well. I like GLW’s stability as a company, but I haven’t looked much into NOV. I’m reading the sixth edition of Security Analysis by David Dodd and Benjamin Graham right now, which I got as a Christmas gift. I have 2 other books by Graham (The Intelligent Investor and Benjamin Graham on Investing: Enduring Lessons from the Father of Value Investing).

  1. says

    I definetly agree with your analysis of NOV. It is now the perfect time to buy because the stock has lost much of its value lately. NOV is well positioned to take advantage of a nat gas boom. I also think that CAT could perform well in 2013 too.

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