In some recent articles, there have been discussions/debates about whether or not it is wise to have a significant cash position in your portfolio at the present time. In this article Chuck Carnevale argued (I am summarizing what I took from the article. Please read it for yourself) that if you find a well run company, with strong financials and a good dividend history, that is at or below fair value, then the time to buy it is NOW, regardless of the state of the market. Two rebuttal articles, by Adam Aloisi and Kevin Wrotenbery, argued (again, my interpretation of their articles) that the stock market today is overpriced, and that it is wise to be holding on to some cash so that when the inevitable market correction comes your portfolio will not drop as much as the market, and that after the correction you will have cash on hand to scoop up bargain priced stocks.
Although I feel that Adam and Kevin make valid points, I find myself agreeing with Chuck. I don't feel that any of us can time the market. Although it does seem to be overpriced right now, when will the correction come? 2014? 2015 or 2016? None of us knows. The market may go up another 20% this year, and if you are sitting on cash you will miss out on some of that advance. Secondly, as a dividend growth investor, I wish to be maximizing the amount of dividends I am collecting at all times (within the boundaries of my criteria for which stocks I will buy. I don't buy the highest yielding stocks just to maximize my income). If I am sitting on a 30% cash position because I am waiting for a market correction, then that decreases my potential dividend income by about 30%. And, with the con-commitment loss of reinvestment and compounding of those dividends over the next 15-20 years, the blow to the value of my portfolio when I retire could be quite large.
As Chuck points out, even in an "over bought" market like the one we have today there are still stocks that are reasonably valued, or even undervalued. I thought that as a follow up to Chuck's article it would be helpful to highlight some of these stocks, thereby giving some real world examples to support his argument. He mentioned a few in his article. I would like to point out some more.
For each of these stocks I will be showing that FAST Graph, demonstrating that in each case they are priced well below the stock's "True Worth." The True Worth line is the orange line on the graph. Any stock priced at or below the orange line can be considered suitable for purchase, at least based on its valuation. For further instructions on how to use FAST Graphs I suggest you read many of Chuck's articles, articles found under the user name F.A.S.T. Graphs, or look at the demonstration on the FAST graphs' website. I have also included the present payout ratio and the Chowder number for each stock, since these are two criteria I use to screen my stock purchases. An explanation of the Chowder number can be found here.
(All data below is from the first trading day of the listed year.
Deere & Co (DE)
Deere & Company manufactures and distributes agriculture and turf, and construction and forestry equipment worldwide.
Deere is trading at a (trailing twelve month) P/E ratio of 9.09. It has a Price/Sales ratio of .94, a Price/Book ratio of 3.29, and a yield of 2.24%. Here is the data for these ratios, as well as the EPS, for the past 5 years.
Deere's payout ratio is 22%
Deere's Chowder number (Yield + the 5 yr DGR) is 15.7
As the FAST Graph shows DE is trading well below its True Worth line (orange) and its normalized P/E line (blue line). Its EPS has increased over 400% over the past five years, but the price has only increased by about 230%. The P/E and P/S ratios are the lowest since 2009, and the yield is higher than it's been for the past four years.
QUALCOMM Incorporated designs, develops, manufactures, and markets digital communications products and services based on code division multiple access, orthogonal frequency division multiple access and other technologies.
QCOM is trading at a P/E ratio of 18.76. It has a P/S ratio of 5.17, a P/B ratio of 3.43 and a yield of 1.91%. Here is the data for these ratios, as well as the EPS, for the past 5 years.
QCOM's payout ratio is 33%
QCOM's Chowder number is 17.8
As the FAST Graph shows QCOM is trading well below its True Worth line (orange) and its normalized P/E line. Its PE, P/S and P/B, are all lower than they have been for over 5 years, and its yield is higher than it has been during that time. The earnings are up over 300% over the past five years, while the price has only risen about 110%.
L-3 Communications (LLL)
L-3 Communications Holdings, Inc. provides command, control, communications, intelligence, surveillance, and reconnaissance systems; aircraft modernization and maintenance; and national security solutions in the United States and internationally.
LLL is trading at a P/E ratio of 12.3. It has a P/S ratio of .75, a P/B ratio of 1.63, and a yield of 2.07%. Here is the data for these ratios, as well as the EPS, for the past 5 years.
LLL's payout ratio is 25%.
LLL's Chowder number is 15.9.
As the FAST Graph shows LLL is trading well below its True Worth line (orange) and its normalized P/E line. LLL has moved up nicely in the past two years, but it is still trading below its highs of 2008.
Wells Fargo (WFC)
Wells Fargo & Company provides retail, commercial, and corporate banking services.
WFC is trading at a P/E ratio of 11.86. It has a P/S ratio of 2.83, a P/B ratio of 1.56, and a yield of 2.67%. Here is the data for these ratios, as well as the EPS, for the past 5 years.
WFC's payout ratio is 30%.
WFC's Chowder number is 29.0.
As the FAST Graph shows WFC is trading well below its True Worth line (orange) and its normalized P/E line. WFC's numbers are hard to interpret due to the effects of the financial crises, but even with the price increase over the past three years it still appears to be undervalued. The earnings are increasing nicely, and the P/E ratio is below historical averages.
Aflac Incorporated, through its subsidiary provides supplemental health and life insurance products.
AFL is trading at a P/E ratio of 10.13. It has a P/S of 1.26, a P/B ratio of 2.10, and a yield of 2.24%. Here is the data for these ratios, as well as the EPS, for the past 5 years.
AFL's payout ratio is 22%.
AFL's Chowder number is 10.4.
As the FAST Graph shows AFL is trading well below its True Worth line (orange) and it's normalized P/E line. Its P/E, P/S, and P/B ratios are all below what they were in 2009-2010.
The stock market is trading at all time highs, and many consider it to be over bought. But I buy individual stocks. I don't buy the stock market. I believe these five stocks are some good examples of how, even in this market, good values can still be found.
Thank you for reading my article. I welcome your comments and criticisms.
(Data obtained from Yahoo Finance, S&P reports, David Fish's CCC list and ycharts.com)