Where To Find The Market’s Best-Priced Gems

Where To Find The Market’s Best-Priced Gems
Carl Hazeley

about 3 years ago3 mins

Mentioned in story

What’s going on here?

By most traditional measures, stock markets look expensive. Despite threatening pullbacks last month, the US S&P 500 index is now trading at 23 times next year’s forecasted earnings, the Stoxx Europe 600 at 18 times – and the booming Japanese Nikkei 225 is priced at almost 25 times its constituents’ projected profits.

Japan, US, Europe valuations

Some investors think we’re in a bubble that’s about to burst – but the optimist in me believes there are still some pockets of value out there. That’s why I’ve run a stock screen using Finviz to help identify any potential opportunities.

What does this mean?

I set the following filters on the screen:

1️⃣ Free cash flow yield > 10%: A high FCF yield suggests not only a cheaply priced stock, but one which is generating plenty of capital to reinvest in the business for future growth – or spend on share price-boosting buybacks and dividends.

2️⃣ Positive sales and earnings growth: A consistent track record of sales and earnings growth over the last five years should bode well for the future too. And that’s reflected in analyst forecasts of positive earnings growth over the next five years.

3️⃣ Market capitalization > $10 billion: These metrics are more likely to be reliable for large and stable companies compared to smaller and more volatile ones – helping reduce the riskiness of our screen.

4️⃣ Positive analyst recommendations: Only including stocks analysts in aggregate recommend buying acts a sense-check on investor sentiment, as well as filtering out companies with major obstacles to higher valuations.

The screen threw up 35 stocks from around the world – of which you can see the top 20 results (sorted by company size) in the table below. You can check out the full screen and make any adjustments of your own adjustments here.

P/E = price-to-earnings ratio (Source: Finviz)
P/E = price-to-earnings ratio (Source: Finviz)

Why should I care?

Three industries showed up as especially attractive: healthcare, financials, and consumer goods and retail. All of these may stand to particularly benefit as the economy recovers from last year’s collapse and investors go in search of value opportunities.

Healthcare insurers like Cigna, for example, will be hoping to put the headwinds caused by the pandemic behind them and return to earnings growth in line with their long-term guidance.

Financials like Bank of America, meanwhile, might be looking to rising US bond yields – even as central bank interest rates remain stagnant – as a source of increased net interest income and therefore higher profit margins.

And for consumer companies like Best Buy and Dollar Tree, the return of vaccinated shoppers to malls and shopping hubs can’t come soon enough: resurgent footfall should bring with it an uptick in earnings.

Still, it’s worth noting that stock markets are generally speaking good measures of value – and these companies’ shares may be cheap for a reason. Combating coronavirus may offer some cause for optimism, but these businesses are facing challenges.

So rather than thinking of these screened stocks as “bargains”, it might be a better idea to view them as investment opportunities where the balance of risk to reward appears skewed in your favor…

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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