Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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| Bargain
Income Stocks with Room to Run |
Published: Nov. 30, 2004
Editor's Note: In each
monthly issue of her High-Yield
Investing newsletter, experienced analyst Carla Pasternak introduces
her readers to several new high-quality income-producing investment
ideas. In her December 2004 issue she used advanced screening techniques
to uncover a list of attractive income stocks that are now trading at bargain-basement
prices. Below you'll find a short excerpt from that issue...
Stocks have rallied to near record levels in the recent bull market.
The broad-based Dow Jones Wilshire 5000 Index, which tracks most
U.S.-based stocks, hit an all-time high earlier this month. Meanwhile,
the price-to-earnings (P/E) ratio for the S&P 500 Index is nearly
21X the past year's earnings. Compared to its long-term historic average
of 16X earnings, the benchmark index is richly valued right now.
The problem is that stocks, like most other things in life, tend to
revert to their historic norms. When prices trade considerably above
their historic levels, they have little room to move. Based on the
current P/E valuation, Standard & Poor's expects stocks in the index
to rise by only +6% over the next 12 months.
Bottom Fishing with Price-to-Book (P/B)
With this in mind, in today's screen we decided to zero in on deeply
undervalued dividend stocks that have plenty of room to move higher in
the months ahead. Finding an undervalued stock that's likely to move
higher is the essence of stock picking. And while price-to-earnings
(P/E) is the most commonly used valuation metric, investors seeking
really deep value stocks often find price-to-book (P/B) ratios
invaluable.
A company's book value is simply what investors would get if the
firm sold all its assets, paid its debts, and went out of business. If a
company has $1 million in assets (such as plants and equipment) and
$600,000 in liabilities (such as bank debt), then it has a book value of
$400,000. The simplest way to find book value, or what a company's
worth, is to look at Total Stockholder Equity on the balance sheet.
In reality, finding a company's true liquidation value is a little more
complicated than simply looking at a company's balance sheet. Company
assets are often held on the books at prices that do not accurately
reflect their current resale value. Nonetheless, the price-to-book value
ratio gives you a rough measure of how closely a firm's share price
reflects the underlying company's net worth.
Price-to-book (P/B) values are usually shown on a per share basis. When
you compare a company's book value per share to its market value -- or
share price -- you get a quick fix on whether the shares are reasonably
priced. A simple example will show how the ratio works. Let's say you
were considering buying a house that was on the market for $600,000.
However, the land and house were appraised at a value of $200,000. Would
you be willing to pay triple the appraised value, even if you thought
real estate prices could rise in the coming years?
This example carries over the same way with share prices. In other
words, the higher the price-to-book ratio, the more you are paying for
the company's assets. As a rule of thumb, a price-to-book of 1 or less
shows good value (if the firm is otherwise solid and growing). The
average price-to-book for S&P 500 components is about 3, and stocks
that sell above that figure may be overpriced.
Look at Maytag
As an example, let's take a quick look at Maytag (MYG, $20.06), for
instance. Value-seeking investors might think they have spotted a
perfect buying opportunity here. The appliance maker's price-to-earnings
(P/E) is only 13X next year's earnings, the stock is yielding a tempting
3.7%, and the shares have already declined nearly -25% in the past year.
However, a more in-depth analysis reveals that the stock is selling at a
huge premium to the value of its assets. Its price-to-book of 39 is more
than six times the industry average and ten times above the market's.
This serves as a warning flag that the stock may be overvalued. And
looking at the fundamentals even further, the company is losing market
share, its debt has been downgraded to junk status, and its latest
quarterly earnings plummeted -80% from the year before. MYG's
extraordinary price-to-book is a red flag that investors would do well
to heed.
Fine-tuning Price-to-Book
Price-to-book gives a quick way to uncover undervalued stocks, but it is
still a rough measure. To really separate the wheat from the chaff, a
better measure is price-to-tangible book. What is "tangible
book"? A company's book value is based on two very different asset
types. Tangible assets are physical or financial, such as equipment or
cash. Intangible assets are things that are harder to measure, such as
goodwill or patents. Legendary investment guru Benjamin Graham argued
that only tangible assets should be taken into account when measuring
book value. (He did say, though, that there may be times when
intangibles such as goodwill should be considered, if their value can be
correctly determined.)
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A Rigorous Screen
To find quality stocks that are selling at reasonable prices relative to
their book value, we used our "Income-Plus" software to search
for stocks with a book value of no more than 50% above their share
price. That figure would give a stock a price-to-book of 1.5 --
less than half the norm for stocks in the S&P 500. Once we found
stocks with a below average price-to-book ratios, we took the next step
and weeded out any stocks with a price-to-tangible book of more
than 2.0. That's well below the average multiple of 7 for S&P 500
stocks.
Other criteria that we used to find solid stocks that are selling at
bargain-basement prices included:
-- Market capitalization of at least $500 million. Stocks with
that kind of size should have a sufficient number of shares to be easily
traded.
-- Dividend yield of at least 1.5%, to make the stock an
attractive addition to an income portfolio.
-- Earnings growth for the past five years, for next year, and
projected for the next five years of no less than +5%. These criteria
helped us zero in on firms with proven growth records and positive
outlooks.
-- Debt to equity (D/E) of no more than 1.5, to eliminate firms
with heavy debt loads.
Out of our universe of some 10,000 stocks that trade on U.S. exchanges,
only 12 met the stringent criteria we outlined above. Here's what we
found:
| Company |
Symbol |
Price |
Yield |
P/B |
| American Financial |
AFG |
$32.06 |
1.6% |
1.0 |
| Bob Evans |
BOBE |
$25.36 |
1.9% |
1.4 |
| Cincinnati Financial |
CINF |
$44.72 |
2.5% |
1.2 |
| Fresh Del Monte |
FDP |
$27.49 |
2.9% |
1.5 |
| Kinder Morgan Mgmt. |
KMR |
$41.58 |
7.1% |
1.5 |
| MBIA Inc. |
MBI |
$60.24 |
1.6% |
1.3 |
| MCG Capital |
MCGC |
$17.74 |
9.5% |
1.5 |
| Old Republic |
ORI |
$25.04 |
2.1% |
1.2 |
| Pep Boys |
PBY |
$14.85 |
1.8% |
1.1 |
| Selective Insurance |
SIGI |
$44.40 |
1.7% |
1.5 |
| SPX Corp. |
SPW |
$41.98 |
2.4% |
1.5 |
| Union Pacific |
UNP |
$63.41 |
1.9% |
1.3 |
One caveat: When you find a deep value stock, you may
have to sit on it for a while until it hatches. It could take time for
the market to be convinced of a stock's growth potential. But since all
the stocks in our list also pay attractive dividends, shareholders
should be well rewarded while they wait.
From this list of a dozen stocks, we handpicked a few that are
trading at a wide discount to their historical pricing levels, as
highlighted below...
Important
Note: To view the remainder of this article, in which
Carla Pasternak provides an in-depth analysis of several of her top
picks from the list above, you'll need to subscribe to our premium
High-Yield Investing newsletter. Please visit one of
the following links to continue...
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Please Note: The above article was merely a
small excerpt from an issue of our premium income newsletter -- High-Yield
Investing. In each issue Carla Pasternak presents
a wealth of information and timely investment ideas to help you earn a
steady income stream from your investments. To receive a
complimentary three-week trial or to learn more about our High-Yield
Investing service, please visit the following link: http://www.StreetAuthority.com/subscribe.asp#hy |
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