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The recent market downturn has been broad-based, with aggressive selling pretty much across the board. When the majority of stocks are falling uniformly, some stocks end up getting penalized perhaps too harshly. While the pundits are debating the increasing likelihood of slower growth or even another recession, it seems that stocks generally are priced very pessimistically already, with the overall valuations, as measured by P/E ratios, similar to where they were at the lows in early 2009.
One part of the market that has been hit a bit too hard in my opinion: large companies with strong balance sheets and a solid history of growth. Some might refer to these as “Blue-Chips”. Many of these companies were able to maintain or even grow earnings during the last recession or at least recover very quickly and move to new highs in sales and earnings subsequently. If this move down proves not to be a precursor of bad times ahead, but rather an example of stocks being more volatile than the larger economy, I would expect these types of companies to do well as their valuations ahead better reflect their prospects. On the other hand, if times are going to be tough, these stocks may benefit from investors favoring them compared to companies with worse balance sheets.
With this in mind, I wanted to design a screen with the goal of identifying large growth companies that appear to be very attractively priced. Here are the parameters I used:
- S&P 500 member
- Annual Sales > $1 billion
- 5-year Annualized Sales Growth > 10%
- 5-year Annualized Earnings Growth > 10%
- Earnings growth past quarter vs. year-ago > 10%
- Projected 2011 Earnings Growth >10%
- Projected 2012 Earnings Growth > 10%
- Net Debt to Capital < 0%
- Forward PE < 20
- PE vs. 5-year Average < 1X
Here is what we get as a first cut:
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As always, the companies that made the cut above shouldn't be construed as recommendations to buy or sell. You should do your own research on any investment you make.
As you can see, the list is filled with names you might know and from a variety of economic sectors, though technology has more than its fair share. At the bottom of the chart, I share some averages, though there is variation among the companies that made the list. The average P/E for this group is 14.6 (10.9-18.6), which works out to be about 70% of the 5-year average (50-90% range). Given that all of these companies have cash and investments in excess of debt, the valuations may be even lower than they appear.
In the far columns, I have included price performance. On average, these stocks have moved into the red for 2011 this quarter, as the 16% average price decline has left the group down 10% on average. This decline is slightly worse than the market on a YTD basis, which seems curious to me. Three of the twelve stocks are up still in 2011, while four have lost more than 20% of their value.
One final observation is that most of these companies don’t pay dividends. In fact, the highest dividend yield is below 2%, which is less than the dividend yield of the S&P 500. I have read many advisors and pundits suggesting investing in dividend-paying stocks, but I would suggest taking a more comprehensive approach than relying on just a single measure of valuation.
So, hopefully I have given you a few ideas to ponder. Again, my expectation is that some of these stocks may have been punished a bit too harshly and might offer limited downside due to their strong balance sheet and relatively low valuations. Of course, one should never expect that historical growth trends will necessarily persist -- but, if these companies are able to replicate their past success during what have been trying times, the prices are likely to rise as earnings grow and as investors potentially grant them valuations more in line with historical valuations.
Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities more fully.
Disclosure: Alan Brochstein does not currently hold any positions in the securities mentioned above.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a business relationship with TradeKing.