I wanted to look for Mega-Cap stocks that were trading at a decent evaluation (Modest P/E Ratios, Reasonably low Price-to-Book Ratios and a PEG of less than 1), had a solid history of growing their earnings, and were expected to continue to do so for the near future.
Search Criteria:
1) Market Cap of $50B or greater (Companies of this size generally are extremely mature businesses, and ones that should know how to deal with Market downturns (With a few exceptions...wondering if someone would mention Citigroup (C)!). By keeping out the high P/E stocks, I tried to eliminate those who were in great danger of a Multiple Contraction if inflation does kick in...)
2) PEG of 1.0 or Less (Growth is only valuable if it is reasonably priced)3) Return on Equity was above 20% or more (Trying to find companies with strong organic growth possibilities, with a minimal amount of Injected Capital to sustain)4) Earnings for the past 5 years averaged 10% growth or better (Company has sustainable growth history)5) Earnings for the next 5 years are anticipated by Analysts to be 10% annually or better6) Price to Book Ratio of 3.0 or less Here are the results:
1) Chevron (CVX)
• Considering the rapid rise in Oil prices over the past few years, it is not surprising to see this sector represented in this screen.
• Chevron has a nice balance in the Oil/Gas space, with strong E&P, Production and Marketing of Oil and Natural Gas. Like most Integrated Oil plays, the refinery part of its business has not been doing as well as the other parts, due to the lower Crack Spreads.
• Assuming that Oil Prices remain above $80/barrel, Chevron should continue to be a great long-term hold. Consensus 1-yr Target prices show it breaking its old high and passing $110…..I think that is quite reasonable.
2) France Telecom (FTE)
• With a dominant Market share of its own country's Market, and an increasing share in other parts of Europe, France Telecom provides Wireless, Landline, Internet and Business Services to millions of customers.
• While many parts of Europe are starting to show signs of recession, Communications companies generally are somewhat insulated (at least on the Consumer side), as most consumers do not give up their Mobile Phone or Internet Access easily.
• At less than 2.0x Book Value (similar to AT&T and Verizon), with a Free Cash Flow total pushing $10B annually and an RoE of over 20%, this one looks like a good stock to weather through the Market turmoil.
• Trading at less than 10x 2008 Earnings, this one has a 1-yr Target price of almost $38 (which is a 30-40% upside from its close on Monday). It also has a 6.5% yield, so it pays you well to wait.
3) Banco Bilbao Vizcaya Argentaria (BBV)
• A safer way to play many of the emerging Latin Markets, BBVA has its roots in Spain, while having a strong presence in Mexico, Central America, Latin America and Asia.
• While Spain is experiencing a downturn, similar to the rest of Europe and the US, BBVA has seen significant growth in their Latin American operations, which now provide about 1/3 of their earnings.
• This stock is now looking extremely cheap, even for a Financial. It is trading at less than 7x Estimated 2008 Earnings, and has a 5% yield to pay you to wait.
• Like the rest of the financials, it still has the possibility to go down a bit further, but the stock is over 30% down from its 52-week high, likely pricing in some of the anticipated risk.
Disclosure: None
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This article has 2 comments:
- jegan ;-)
- 695 Comments
Aug 20 07:08 PMjegan ;-)
- Larry Bellehumeur
- 62 Comments
Aug 21 12:32 AMAlways a chance that could happen, especially if the Spanish economy continues to putter along. As well, if the US economy does continue down into a further tailspin, this would hurt Mexico and others dramatically. I have to believe that a lot of this is price into the stock, but seeing it drop another 10% is not impossible.
I would think that this one has serious legs to run over the next few years. I'm close to pulling the trigger on a 1/2 position now, then seeing where it goes. I wouldn't be offended if I had to "average-up"...
Larry
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