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Summary

  • I have selected three quality names with an excellent long term performance.
  • Candidates trade at an appealing valuation, have a rock solid balance sheet and display high return on equity.
  • A diversified position in these names and other shares meeting less stringent criteria could be interesting for value-seeking and contrarian investors.

In this article I look at three quality US companies with excellent long term track records which recently have fallen out of favor.

To make it in the list a company must be listed in the US. The company furthermore has to have a market capitalization of at least $2 billion and its shares must be trading down over the past year. Shares must furthermore trade at less than 20 times earnings while return on equity is north of 20%. Limited leverage, or preferably a net cash position is a big plus as well.

I have three common names coming up at my screen after applying these criteria being Bed Bath & Beyond (NASDAQ:BBBY), Coach (NYSE:COH) and Dick's Sporting Goods (NYSE:DKS). Note that more names appear on the screening, yet I refrain from investing in financial and technology names, among others.

Over the past year each of these companies have lost terrain while the SP&500 has returned some 15%.

Bed Bath & Beyond

Shares of the retail chain selling domestic merchandise and home furnishing goods have seen a difficult year in which shares lost some 10.7%. Its long term 10-year returns of 68.8% are in line with S&P500 returns of 73.8% over the same time frame.

Just like the wider retail sector, shares have fallen out of favor recently with the company reporting a modest drop in both sales and earnings. While these are reasons for concern, the company has a long term track record of growing operations in a profitable manner for its shareholders.

Over the last years the company has grown revenues at a compounded annual growth rate (OTCPK:CAGR) of more than 9% while earnings grew at little over 8% per annum. As the company repurchased its shares at a rate of more than 4% per year, earnings per share growth was over 12%.

At current levels the stock is valued at $12.5 billion or around $11.6 billion net of cash being held. This values shares at little over 11 times trialing earnings which sounds quite appealing to me.

Coach

Coach is of course best known from its women's hand bags and its shares have slumped 28.1% over the past year amidst worries about the steep fall in US sales, the grills of the fashion industry and stiff competition from Michael Kors (NYSE:KORS), among others.

Long term returns of 107.1% over the past decade are still impressive despite this year's correction. Despite these headwinds the company has a stellar reputation of growing its business in the long term in a profitable manner while returning cash to investors.

Revenues over the past 9 years have grown at a rate of 16% per annum to little over $5 billion. Earnings grew even quicker, approaching a growth rate of 18%. Coach repurchased its own shares in great quantities as well at a rate of 3-4% per annum, providing an additional boost to earnings per share.

At current levels Coach is valued at $11.4 billion or around $10.9 billion once subtracting the net cash position. This values shares at little below 12 times trialing earnings which is quite attractive.

Dick's Sporting Goods

Dick's is well known for its sports and fitness apparel which it carries for some major apparel brands like Columbia, Nike, The North Face and Under Armour. The latest disappointment, poor sales at Golf Galaxy and its hunting business, triggered a big sell-off in the past week sending shares 16.6% lower for the past year.

Despite the latest correction shares are still up some 240% over the past decade, vastly outperforming the S&P500. This outperformance has been driven by a nearly 13% annual growth rate in revenues while earnings grew by more than 19% on average per annum. Earnings per share growth has been more limited due to dilution, coming in at around still an impressive 17% per annum.

At $43 per share, Dick's is valued at roughly $5.2 billion while the company operates with a very limited net cash position. At current levels shares are valued at around 15 times trailing earnings.

Takeaway For Investors

All screens being applied to traditionally high returning businesses with an underperformance in their share price as of lately point towards apparel, retailer or luxury stocks.

The sector has been hit by harsh weather as of lately but faces other pressures as well including pressure on discretionary consumer income as well as a very competitive market space and online competition.

That being said, there are still dominant long term value creating players out there, meeting the criteria of an interesting valuation and a rock solid balance sheet which are worth a look. A diversified portfolio in companies meeting these criteria might offer an interesting risk-return reward.

Good luck out there.

Source: 3 Quality Names With Solid Balance Sheets, Appealing Valuations And High Return On Equity