As my current phase of stock accumulation is being half allocated to high-yielding stocks (as explained in my previous article, "5 High-Yield Stocks I Am Buying Now"), I tend to balance this out by placing the other half of my accumulation on stocks irrespective of their current dividend yield and instead try to find the best value plays in my currently existent universe of stocks. I narrowed this further down by limiting myself to stocks with a PEG ratio, when available, of between 0 and 2.33.
It must be duly considered that we are at the high end of a multi-year bull market which has gone up, with little deviation almost as if the S&P 500 was the hypotenuse of a right angle, since mid-2011. Almost all decent boats have risen, and many well known names have been significantly better than the broad market. The goal here is not to simply look at the best gainers of the last three years and pile into them. In fact, the exercise I am about to embark on would be the opposite in purpose.
The goal of the below and my portfolio allocation over the next few months is to be well situated whether the current market trend continues, or if the big correction everyone fears does eventually materialize. In the below all figures are provided by Yahoo Finance, unless otherwise noted.
Berkshire Hathaway, Inc. (NYSE:BRK.B): The world's best known industrial conglomerate with Warren Buffett as Chairman/CEO, BRK.B or BRK.A is usually considered a slam dunk choice. Sometimes it really is a no-brainer. If you want to invest like Mr. Buffett, the first and easiest thing to do is invest WITH Mr. Buffett. Taking that to the fullest extreme, one could also populate their portfolio with comparable holdings in the companies BRK.B invests in, such as IBM, BAC, etc. The difference for the individual investor is we rarely get the opportunity for the sweetheart deals that often manifest themselves for Mr. Buffett's elephant gun. Remember when BAC threw in the warrants for free? How much extra profit icing was that on the cake? Investing with BRK.B gives the individual investor the ability to ride the coattails on these opportunities and special situations that only manifest themselves for Mr. Buffett and BRK.B and BRK.A shareholders.
In this case I am doing this analysis of BRK.B shares because firstly, this is what I own, and secondly, the difference between A and B shares is rudimentary. If you have enough capital to invest in an A share(s), then do it. Otherwise, B shares are the domain of most individual investors. The difficulty in metric analysis is that BRK.B shares often do not have comparable metrics to other companies. The result is that a person can sort of amalgamate these from the available metrics from A shares, use alternative data sources, or guess. In my case I will use what I can find from BRK.A shares.
BRK.A has PEG ratio of 1.77 and a price/book ratio of 1.41, both of which put it in the range I am comfortable with as a core investment. Of course it is better the closer to 1 either of those numbers could be, but those rare times when BRK.A or BRK.B could present that opportunity are few and far between. Unlike the next four stocks I am going to examine, BRK.B sits just about 1% below it's 52-week high. The 1-year target price for BRK.B is 144.00, which is a bit more than a 12% increase from the most recent close of 126.42. What gives me the most confidence in BRK.A or BRK.B in the case of a market slowdown or correction is the low Beta (0.25 and 0.29, respectively). Additionally, as evidenced by the results of Mr. Buffett's efforts during the 2008-09 crisis, what is bad for the market may be good for BRK.A and BRK.B. As morbid as it may sound, if there is a major market reversal, you can expect Mr. Buffett to be one of those with enough dry powder to make the most of it. The final bit of metric data that I would highlight here to support my thesis is that the Analyst Opinion Mean Recommendation score for BRK.A (and presumably BRK.B) sits at 1.5, which illustrates that analyst sentiment is generally in line with my own.
Frontline, Ltd. (NYSE:FRO): It is not going to all be clear sailing going forward from here, and troubled waters are nothing new to this owner and operator of oil tankers and oil/bulk/ore carriers. Aside from the PEG ratio of 0.24, there is not much else as far as metric data that supports a thesis for FRO. The most recent close of 3.63 places FRO almost 30% below the 52-week high, which would be opportune news if the one-year target price was near to that high. It is not. The one-year target price is 2.96, which would be a 22% decline from today's closing price. The Analyst Opinion Mean Recommendation score for FRO is currently 3.5, which is as near to a "kiss of death" as I would normally allow myself to travel. A short ratio overhang of 7.8 is worth noting here as well, as it could be quite a profitable short squeeze if news does surprise to the upside.
Bearing all the above in mind, is there any prospects for a reversal of FRO's fortunes? There may be, as a rise in shipping rates have been evidenced by some competitors of FRO, and last week saw a 11.8% jump in a session on the back of this information. Nordic American Tankers (NYSE:NAT) is expected to release earnings by mid-May and if they also report recovery in day rates for shipping, then the turn around that FRO CEO, Chairman, and President John Fredriksen has been waiting for could finally be in the offing. It was not so many years ago that FRO was a very highly profitable dividend paying stock, and a return to those days is worth a risk at these levels.
Walter Investment Management Corp. (NYSE:WAC): The residential mortgage servicing firm is in it's own pot of hot water, but if the prospect of betting on a side of a class-action lawsuit does not deter you, WAC may be just the ticket. WAC currently trades with a PEG of 0.84 and a price/book ratio of 0.90, putting them as a value versus perceived book value. WAC is down almost 40% from their 52-week high after a flurry of lawsuits filed since the Feb. 27, 2014, revelation that a recently acquired subsidiary is being investigated for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. It may be prudent here to keep an eye on WAC and wait for more losses prior to putting in a position. For what it's worth the short ratio for WAC is only 6.5, and there is almost 67% institutional ownership of the shares in the last reporting period according to Seeking Alpha. I would be even more optimistic here if there was not a net -6,886 share insider sales (92,494 sales versus 85,608 purchases). Insider buying is a good thing for a stock with as many question marks as WAC currently flaunts.
Cabot Oil & Gas Corporation (NYSE:COG): The independent oil and gas company does not have nearly the headwinds that WAC and FRO face, and enjoys a ridiculously low PEG ratio of 0.58. While the price to book is 6.60, there is a great deal of positive market sentiment for COG as illustrated by the Analyst Opinion Mean Recommendation score of 1.9 and short ratio of 2. COG is currently almost 16% of off the 52-week high, and the one-year target price is 45.35, which is a 22.5% increase from the most recent close of 35.12. The dividend yield of 0.20 is just extra icing on the cake. According to Seeking Alpha, COG is 93.3% institutionally owned and has insider ownership of 6.7%, all terrific numbers. The only detractor here is a rather small negative movement of -8,690 insider shares in the most recent reporting period. However this was on a total of over 493,000 insider shares being bought and sold.
Perrigo Company Plc (NYSE:PRGO): The international OTC and prescription pharmaceutical company currently sits with a PEG ratio of 1.62 and a price/book ratio of 2.23, which puts it at a significant better value than COG at this time. Sitting at just about 14% below the 52-week high and boasting a one-year target price of 174.79 on the most recent close of 145.15 indicates a possible upward profit of almost 17%. Analysts are positive, with a mean recommendation score of 1.8, and according to Seeking Alpha institutional ownership of 41.9%. Again, a negative movement of -31,278 insider shares in the most recent reporting period is a reason to give pause, and this was on a much thinner total of 182,308 insider shares being bought and sold. Again, a small dividend yield well covered by earnings per share may indicate that future dividend growth is possible.
I have created a public portfolio at Reuters.com to keep track of the results of these five stocks over the course of the next few months.I hope that the results more than outpace even my lofty expectations. I created the portfolio with $1,000 of each of the above five stocks based on their April 21, 2014, closing prices (BRK-B 126.50, FRO 3.63, WAC 27.82, COG 35.12, and PRGO 145.15). You will need to have a Reuters login to see the portfolio and create your own public portfolios, but this is a free service.
Disclosure: I am long FRO, PRGO, COG, BRK.B, WAC, NAT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.