What are we looking for?
U.S. stocks offering the potential for long-term earnings growth while providing reasonable valuations and efficient operations today.
With the U.S. stock market now up more than 10 per cent since the election in November, many investors are beginning to question whether there are still good values to be found. In Benjamin Graham's classic 1949 book The Intelligent Investor, the author asserts a number of principles when shopping for companies offering growth at a reasonable price (GARP). In this article we will put together our own formulation looking for long-term earnings growth, dividends and reasonable forward price-to-earnings ratios.
The screen
We will be using Recognia Strategy Builder to identify well-valued companies in the U.S. market using value investing criteria.
We begin by setting a minimum market capitalization threshold of $10-billion (U.S.) to focus on the largest and most stable stocks in the market. Next, we will employ three screening criteria to identify stocks that would be of interest to bargain hunting investors. Specifically, we will look for companies with forward price-to-earnings (P/E) ratios of less than 15, a five-year historical annualized EPS growth rate of 15 per cent or more and dividend yield of 2.5 per cent or more.
Finally, to look for stocks with efficient business models, we will select only companies with operating margins of 10 per cent or greater. Operating margin is a measure of the profit a company makes on each dollar of revenue – higher operating margins are preferred.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Topping our list is Blackstone Group, the world's largest alternative asset manager focusing on private equity, credit and hedge fund investing. Blackstone has been one of the largest leveraged buy-out firms in recent years and has a strong track record of earnings growth. Blackstone stock is up 26 per cent since the U.S. election in November but still has a reasonable forward P/E ratio. On Jan. 26, the company released fourth-quarter results that beat analyst estimates handily for both earnings and revenue.
Telecom giants Verizon Communications and AT&T both make our list indicating the value that is still to be found in the U.S. telecom space. The threat of rising U.S. interest rates held down the prices of these stocks in late 2016 leading to attractive forward P/E ratios and dividend yields. Both stocks have a long-term track record of earnings growth.
The lowest P/E ratio on our list belongs to biotech giant Gilead Sciences, with a forward P/E of just six. Concerns about growth prospects for Gilead's flagship hepatitis drugs have dragged the stock price down approximately 20 per cent over the past year. With strong operating margins and a 2.6-per-cent dividend yield, Gilead looks like a stock that may reward patient value investors.
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 vice-president of retail and self-directed investing at Recognia Inc.