My Value Watch List: 4 Names on My Radar
October 31, 2017, 11:04 am
While stocks with the all-important “margin of safety” we like to look for in terms of valuation are harder to find than they were a year or two ago, I continue to see attractive opportunities hitting my screens. I’ve added a few new names to my watch list recently, and I wanted to share four that are particularly interesting right now.
Omnicom (OMC), the world’s largest advertising agency, has declined as growth has slowed with more firms bringing their ads in house or working with online giants Alphabet (GOOGL) and Facebook (FB). However, while overall third-quarter revenue reported two weeks ago was lower due to sale of businesses, organic revenue was up nicely at 2.8% and earnings increased to $1.13 a share from $1.06 a share.
The stock is cheap at 14.4X 2017 and 13.6X 2018 EPS estimates, but the post-earnings decline following an initial surge indicates there is a good bit of skepticism about the estimates. I’m keeping a close eye on the shares to see how they stabilize, but OMC remains on my watch list as a high-quality company that seems to be selling at an undeserved discount.
Lowe’s (LOW) has greatly lagged rival Home Depot (HD) the past several years, but has still grown nicely with a little over 10% earnings growth expected this year and next. At 15.5X next year’s fiscal EPS estimates, the stock sells not only at a discount to the market but also HD’s 19.6X. Plus, with an effective tax rate of about 38%, LOW would benefit greatly from any reform that would lower the top marginal rate – something the stock price does not currently reflect.
While the potential impact of rising interest rates on housing is a concern, Lowe’s is becoming more attractive in this market environment that features even more cyclical companies selling for higher multiples.
Citizen’s Financial Group (CFG) is the holding company for the New England- and Mid-Atlantic-based Citizens Bank. The stock jumped after reporting a third-quarter earnings beat and a 5% revenue gain, as average loans were up 5.4% and interest margins increased 21 basis points.
CFG sells at a discount from most banks at 1.4X tangible book value and 13.4X 2018 EPS estimates. With the economy and credit conditions remaining sound, it could become very attractive.
General Electric (GE) has had a rough time since April 2015 when it was all the rage following the sale of its GE Capital assets. After originally surging 11% on the news, the stock proceeded to underperform its industrial peers before starting a slide last December that took it below pre-announcement levels.
What went wrong? The company’s industrial businesses simply could not grow fast enough to keep pace with the dilution from the sale of the financial businesses. In addition, GE’s investments in power generation have not paid off, and the acquisition of oil services company Baker Hughes has been unsuccessful. During GE’s most recent earnings call, new CEO John Flannery, who took over this year for an embattled Jeff Immelt, lowered annual earnings guidance to a seven-year low at $1.05-$1.10 a share (expectations were $1.50-$1.55 a share).
Shares initially plunged on the earnings revision, but quickly recovered as the strong market led to index buying of the name, and there was hope that Flannery could execute a quick turnaround. However, the company still has a long road to get back. GE will sell $20 billion worth of its businesses, or 13% of its total assets, over the next two years. These sales will likely lead to more earnings dilution, and a dividend cut will almost surely come in December.
So why is GE on my radar? While I would be cautious with the stock in the near term, I think the trading action shows that institutional investors who are starved for bargains were willing to jump in. Some additional weakness is likely as the company tries to straighten the ship, and a dip toward $20 would put it at attractive levels for an eventual rebound.
While we wait for those names to turn into strong buys, there are several stocks on my Value Authority Buy List right now that are offering strong opportunities that make for great investments now. I don’t want you to miss out on any of them, so I recommend signing up today for my risk-free trial so you can join this profitable journey with me!