Deep Value Opportunities Becoming Scarce

Catch them while you can. The number of deep value opportunities in the market is quickly disappearing. There are still some companies trading cheaply on an absolute basis, but the ranks have thinned substantially since early March. Investors looking for deep value opportunities for the long term will find that opportunities are getting scarce.

The beginning of March marked the low point for the stock market and offered up the best deep value opportunities in decades. There were 179 companies that were super-cheap on a P/E basis (based on long-term earnings) and with high earnings yields and dividend yields relative to the average AAA bond yield, according to James Montier of Societe Generale. These were high quality names like Microsoft (MSFT), BP, Sony (SNE) and Novartis (NVS).

That list of deep value stocks has appreciated 48% in dollar terms since the beginning of March, bettering the performance of the MSCI All World Index by 16%. As a result, the ranks of deep value companies have thinned out by two-thirds.

Investors looking to pick up some stocks on the cheap can still look to Marathon Oil (MRO), Merck & Co. (MRK), Genuine Parts Co. (GPC), Chevron Corp. (CVX), and Carnival Corp. (CCL) in the United States. On a global basis, oil majors are still on the list of deep value names as tabulated by Montier with the notable exception of Exxon-Mobil (XOM). However, BP, Royal Dutch Shell (RDS.A), Total (TOT), StatoilHydro (STO), and ENI remain cheap.

Of course, the disappearance of deep value stocks is a signal that the market has risen far enough. The best strategy is to rotate into what is still cheap and even keep some dry powder in case those high quality names get cheap again.

Comments

[Larry House:]

I ran a value screen the other day, and with the parameters I selected, only two stocks came up--MRO and CVX. I am not saying they are the only true value names out there, but the screen results showed me that it is getting harder to find convincing value right now. Your article is right on.

May 21 02:16 PM

[Investigator:]

MRK? I would not want this stock even if it s free.

May 21 02:27 PM

[HerrHansa:]

I bought into Statoil (STO) in early March as a long position. If it dropped quite a bit again, I would likely buy more. What I like is that they are diversifying more into alternative energies, and that they have a low cost per barrel for oil production.

May 21 04:38 PM

[Paul Price:]

Court Upholds Landmark Racketeering Suit Against Tobacco

By BRENT KENDALL
WASHINGTON -- A federal appeals court Friday upheld major points of a landmark ruling that said the tobacco industry violated federal racketeering laws in a scheme to deceive the public about the dangers of smoking.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit rejected, however, the Justice Department's request for additional penalties against cigarette makers, including a proposal that the tobacco industry fund a $10 billion national smoking-cessation campaign.

Defendants in the case included Altria Group Inc.'s Philip Morris subsidiary, Reynolds American Inc., British American Tobacco PLC and Lorillard Inc.

Murray Garnick, an Altria senior vice president, said the company disagreed with the ruling and would appeal. Altria could first ask for a review of the case by the entire D.C. appeals court.

Spokesmen for the other companies could not immediately be reached for a comment.

In a unanimous 92-page ruling, the court said Friday there was ample evidence to conclude the tobacco industry intentionally deceived the public about the harmful and addictive effects of cigarette smoking.

The court affirmed most of the remedies imposed against tobacco companies in 2006 by U.S. District Court Judge Gladys Kessler following a nine-month trial, including a ban on promoting brands as "light" or "low tar." Judge Kessler's ruling also required the industry to make corrective public statements about the health effects and addictiveness of smoking.

"[T]he court's conclusions are not supported by the law or the evidence presented at trial, and we believe the exceptional importance of these issues justifies further review," Altria's Mr. Garnick said.

The case dates back to 1999, when the Clinton administration filed a federal racketeering lawsuit against nine tobacco companies and two trade associations, alleging they had engaged in a 50-year conspiracy to deceive the public about the dangers of smoking.

The court on Friday said the tobacco companies "knew about the negative health consequences of smoking, the addictiveness and manipulation of nicotine, the harmfulness of secondhand smoke, and the concept of smoker compensation, which makes light cigarettes no less harmful than regular cigarettes and possibly more."

The court further said the government had adequately proved that the tobacco industry was likely to commit future racketeering violations unless restrictions were imposed. But it also affirmed an earlier ruling that the government could not force the industry to forfeit as much as $280 billion in profits.

Matthew Myers, president of the Campaign for Tobacco-Free Kids, said the ruling was a "tremendous victory for public health," but that the court's refusal to allow additional remedies was disappointing. "It means that there's much more that needs to be done to counter decades of wrongful behavior by the tobacco industry," he said.

A Justice Department spokesman said government lawyers were reviewing the decision.

May 22 07:31 PM