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In this article, I will be looking for companies that are undervalued compared with other companies in their respective industries. Because the stock market is near all-time highs it is getting more difficult to find companies that are undervalued. With the current level of interest rates near zero, dividend stocks have been bid up in the search for yield. An example is Altria (NYSE:MO), which over the last five years has traded at an average PE of 13.9, but is currently trading at a PE of 17.5, which is substantially higher than its historical average. In addition, Altria is trading at a higher PE than the current PE of the S&P 500 (NYSEARCA:SPY), which is 16.6. [Data from Altria Morningstar Valuation page]

To screen for stocks that are undervalued I will be using the Finviz.com stock screener to assist me in my search. In the list below are the criteria I used for my screen to get my base list of stocks to start with.

Screener Criteria

  1. Market Cap: Over $50 Million
  2. Industry: Stocks only [Ex-Funds]
  3. P/E: Profitable
  4. Forward PE: Profitable
  5. Dividend Yield: Positive
  6. EPS Growth This Year: Positive
  7. Average Volume: >100K
  8. Current Volume: >0

I chose to use the above criteria to make sure only stocks that were profitable, pay a dividend, and are expected to grow earnings this year were included. I entered the above criteria, and found that 814 stocks met all of them. I then exported those results into a spreadsheet for further refinement. As I stated above I want to find companies that are undervalued in their industries, so I eliminated any stocks that had less than three companies in their industry. After doing this, I was left with 709 stocks in 107 different industries.

Goals

Instead of just simply looking at each industry and seeing which company had the lowest PE ratio, I wanted to make my screen more thorough, which is why I included the screener criteria above of dividends and EPS Growth. To make it to my final list of undervalued companies, the company had to meet the following goals:

  1. PE Ratio: Have the lowest PE ratio in the industry.
  2. Dividend Yield: Have the highest dividend yield in the industry.
  3. EPS Growth: Have the highest expected growth this year in the industry.
  4. Performance: Have Lowest Performance YTD in the industry.

Results

Out of the 709 companies on my refined list, only three of them met my above goals: CH Robinson Worldwide Inc. (NASDAQ:CHRW), Parker Hannifin Corporation (NYSE:PH), and California Water Service Group (NYSE:CWT). Below is a table with data for each stock that made my final list as well as the other companies in the industry. [Data from Finviz]

Ticker

Company

Industry

PE Ratio

Dividend Yield

EPS growth this year

Perf YTD

CHRW

CH Robinson Worldwide Inc.

Air Delivery & Freight Services

15.92

2.40%

39.95%

-6.97%

FDX

FedEx Corporation

Air Delivery & Freight Services

16.47

0.59%

39.94%

2.82%

FWRD

Forward Air Corp.

Air Delivery & Freight Services

20.39

1.10%

11.21%

4.50%

Ticker

Company

Industry

PE Ratio

Dividend Yield

EPS growth this year

Perf YTD

PH

Parker Hannifin Corporation

Industrial Equipment & Components

13.19

1.94%

16.98%

4.81%

B

Barnes Group Inc.

Industrial Equipment & Components

15.33

1.47%

8.72%

21.95%

WTS

Watts Water Technologies, Inc.

Industrial Equipment & Components

23.40

0.96%

13.88%

6.92%

Ticker

Company

Industry

PE Ratio

Dividend Yield

EPS growth this year

Perf YTD

CWT

California Water Service Group

Water Utilities

16.78

3.26%

29.10%

7.86%

AWR

American States Water Company

Water Utilities

19.48

2.58%

26.93%

15.69%

AWK

American Water Works Company, Inc.

Water Utilities

19.51

2.43%

21.95%

10.85%

WTR

Aqua America Inc.

Water Utilities

23.98

2.23%

28.77%

24.30%

Historical Valuations

In my first paragraph, I used the example of Altria being overvalued compared to its historical average PE ratio. Therefore, in the table below I will use the same process to show that the three companies that made my final list, are undervalued compared with their historical averages. All three stocks are undervalued compared with their historical average PE, and two of the three are undervalued compared with the S&P 500.

Symbol

Company

Current PE

5 yr historical avg PE

S&P 500 PE

CHRW

CH Robinson Worldwide Inc.

15.9

26.4

16.6

PH

Parker Hannifin Corporation

13.1

15.8

16.6

CWT

California Water Service Group

16.8

20.0

16.6

Closing thoughts

I believe the three companies that met my rigorous screen will be strong performers going forward because of the unique combination of having the lowest PE, highest dividend yield, highest growth, and lagging performance, in their respective industries. While many dividend stocks have been bid up over the last year, all three of the stocks that made my final list, have a dividend yield that is higher than the S&P 500.

Disclaimer

Source: Finding Value With The Market Near All-time Highs