What are we looking for?
U.S. stocks looking well valued despite the recent stock market run-up.
Since the U.S. election in early November, U.S.-listed stocks have surged ahead with the S&P 500 shooting up 12.8 per cent and the Dow up 14.6 per cent. The U.S. Federal Reserve's decision to begin winding down its $4.5-trillion (U.S.) in debt securities – revealed in minutes released Wednesday of the Fed meeting earlier this month – has spurred further bullish sentiment among investors. With U.S. stock markets now at or near all-time highs, is there still good value to be found?
The screen
We will be using Recognia Strategy Builder to identify promising companies in the U.S. market using traditional value investing criteria.
We begin by setting a minimum market capitalization threshold of $1-billion. We wish to focus on large-cap names in the market because of the greater stability and safety they offer. Approximately 25 per cent of U.S. stocks have a market cap in excess of this threshold.
Second, we will employ three value investing criteria to identify stocks that would be of interest to bargain-hunting investors. Specifically, we will look for companies with a forward price-to-earnings ratio (P/E) of less than 13, debt-to-equity of 1.0 or less and an annual dividend yield of 2 per cent or more.
Finally, to look for stocks with growing investor interest, we will employ a trading criterion: 10-day against 90-day average volume. We wish to find companies whose 10-day average volume is 125 per cent or more of the average volume over the past 90 days.
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 American Eagle Outfitters Inc. The U.S. retail sector has been beaten up in the past year, which explains the outsized number of well-valued retailers on our list. American Eagle is currently looking very attractive from a value investing perspective with a 4.4-per-cent dividend, zero debt and very low forward P/E of 9.1. On May 17, the company announced first-quarter results that narrowly missed analyst expectations for revenue. The company also offered weak profit guidance, which caused the company's stock price to fall to a 52-week low.
The lowest forward P/E on our list belongs to auto-parts manufacturer Magna International Inc. Magna has been a strong performer over the past year, outperforming analyst estimates and recording an annual stock price gain of 11.3 per cent. Magna has also seen above-average levels of trading recently (due in part to their strong earnings on May 11) and has a 10-day to 90-day volume ratio of 1.36.
The largest company on our list is insurance giant American International Group Inc. with a market capitalization of $57.6-billion. Last week, the company announced the appointment of a new president and chief executive, Brian Duperreault, to focus on efficiency and earnings growth. Analysts at Morgan Stanley liked the news and raised the target price for the stock to $72. The shares closed Thursday at $63.12.
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.
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