The recent market sell-off provides investors with the opportunity to buy cheaper stocks. The secret to market-beating risk adjusted returns is to find stocks that are trading significantly below their intrinsic value and buying them with a margin of safety. I have analyzed a list of stock ideas for investors to look into:
Bank of Ireland (IRE) - Bank of Ireland operates a wide range of financial and banking services. Shares of IRE have traded near $100 in the last few years, but are currently trading at $1.18 a share, just above their 52-week low list. For the year, the stock has underperformed the market with a decline of 56.3%. The reason for this is that investors are worried that the European debt crisis will be worse than the crisis in the United States. Although the Irish government has provided money to its major banks, it probably does not have the capital to back these institutions until the situation stabilizes.
For investors looking for opportunistic trades, IRE is a good stock to look at. Investors in this stock would need to be of the opinion that the Irish government will be the first among the PIIGS countries to emerge from this crisis. However, it currently trades at 0.15 times book value, which suggests that investors are betting on a bank failure in the near-term. Given that the company has secured a fresh investor base and an improved loan portfolio, it looks like an intelligent speculation for someone with a high risk appetite.
OneBeacon Insurance Group, Limited (OB) - OneBeacon Insurance Group is a Minnesota-based property insurer. The company was founded in 1831, which gives some assurance to investors of a good track record of underwriting discipline and profitability. The company operates under three underwriting units, namely; MGA Business, Specialty Insurance and Specialty Products. It has sold its personal lines division and AutoOne Insurance to focus on specialty insurance and property products. This will ultimately lead to higher profitability in the future.
The stock is valued at 12 times next year’s earnings, 1.09 times book value and has a 6.40% dividend yield. While dividends have grown steadily at 3%, the current low price of OB makes it attractive to investors. OB is one of the cheapest insurance stocks out there. Similar property and casualty insurance stocks trade at higher valuations. For example, Markel Corporation (MKL) is valued at 15 times earnings and 1.15 times book value. However, the market appears bearish on the stock with a neutral and market-perform rating. The target price is pegged at $13.88. Investors will also find it assuring that OB is a subsidiary of White Mountains Insurance Group (WTM), one of the best managed property and casualty insurance companies available.
Encana Corporation (ECA) - Encana Corporation is a natural gas company that operates in British Columbia and Alberta, and also operates the Deep Panuke gas offshore project in Nova Scotia. Given that natural gas is not a favorite of investors right now, the stock has declined by 18.29% for the year. Prices of natural gas have not recovered to their pre-recession levels above $13 a share. However, market pundits are expecting a rebound in natural gas prices and sentiment. With the excess supply due to horizontal drilling starting to decline, natural gas prices could double over the next few years. Analysts expect earnings per share of $0.95 next year, an increase of 79.24% year on year.
At the current price around $23, the stock is valued at 24 times next year’s earnings and 3.30% dividend yield. This is higher than Penn West Petroleum Ltd (PWE) valuation of 15.43 times earnings and 6.20% dividend yield. The premium valuation is attributed to higher return on capital of 19.27% for the last 5 years, higher than PWE’s return on capital of 9.81%. Analysts have rated the stock a “sell and underperform,” although the fundamentals of the company have appeared strong. The recent quarterly performance can attest to that. It has beaten second quarter earnings per share estimates by $0.07 despite the low levels of natural gas prices.
ConocoPhillips (COP) - The latest oil leak at the oilfield in the northern Bohai Bay in China has created an outrage. The oilfield is co-owned and operated by ConocoPhillips (49% share), along with China's biggest offshore state oil company, CNOOC (CEO) (51% share). As a result of the oil leakage, the State Oceanic Administration (SOA) is planning to sue ConocoPhillips on grounds of carelessness. It has also ordered the PL19-3 oilfield in the northern Bohai Bay to suspend all operations due to a failure on the part of ConocoPhillips to fix a two-month old leak. ConocoPhillips claims to have sealed off all leaks before the Aug. 31 deadline.
Although the event has caused CNOOC shares to tumble 11%, shares of COP are not greatly affected. The stock is presently trading at $66.44 with a 52-week range of $81.80 – $53.59.
The return on equity for the company is higher than the 5-year average of 7.5% at 16.5%. The EBITDA margin is 11.4% and the EBIT margin is 10.2%. The gross and net profit margins are 20.4% and 6.0%, respectively. The 5-year average gross and net profit margins are 24.5% and 2.8%, respectively. COP earnings per share are $7.62 and PE ratio is 8.3. Industry peers such as BP plc. (BP), Chevron Corp. (CVX) and Exxon Mobil Corporation (XOM) have PE ratios of 5.8, 8.4 and 9.5, respectively.
Sanofi Aventis (SNY) - One of the top picks in the healthcare industry is Sanofi Aventis. SNY has been a favorite among the hedge fund managers, and the company is expected to stay on the upward ramp for the next 4 years. The French drug manufacturer is planning strategies to cut down its costs within the week. The patents of many products, such as cancer drug Taxotere, Lovenox, bloodthinner Plavix, and Avapro are expiring by 2013, but the company is working out new projects in order to compensate for the effect these patent expirations will have on profits. The drug industry is one of fierce competition, with firms such as Novo Nordisk (NONOF.PK), Glaxo (GSK) and Novartis (NVS) driving down product prices. Most Sanofi drugs face a challenge from cheaper generics.
Sanofi CEO Chris Viehbacher has declared that, after buying U.S. biotech Genzyme (GENZ) earlier this year, the company will now expand into areas such as rare diseases, emerging markets and animal health. This is essential to maintain investor confidence in a stock which would have dwindled due to a drop in drug sales. There is also a possibility of share buybacks.
SNY shares are trading at $35.05 with a 52-week range of $29.66 – $40.75. The PE ratio of SNY is 15.13. The market capitalization is $94.09 billion, and EPS is $2.32. The gross profit, EBITDA, EBIT and net profit margins are 87.4%, 48.1%, 17.0% and 17.9%, respectively. The 5-year averages of gross and net profit margins are 79.5% and 16.7%, respectively. Return on equity is 6%. A dividend of $1.322 per share was distributed to stockholders June 24, 2011, and the dividend payout ratio remains around 40%.
M & T Bank Corporation (MTB) - A bank holding company, M & T Bank Corporation is currently trading at $72.29 with a market capitalization of $9.08 billion and EPS of $7.08. The 52-week range of the stock is $69.23 to $95.00.
For the second quarter 2011, diluted earnings per common share on a GAAP-basis grew 66% to $2.42 from $1.46 in the same quarter last year, and 52% from $1.59 in the previous quarter of 2011. Net income was $322 million. This was significantly higher than a net income of $189 million and $206 million in the second quarter of 2010 and the first quarter of 2011, respectively.
Second quarter results were affected by some important events during the year. The acquisition of Wilmington Trust Corporation, effective May 16, 2011, included the issuance of 4.7 million common shares. Assets worth $10.8 billion, including $6.4 billion in loans, and liabilities worth $10.0 billion (including $8.9 billion of deposits) were acquired in the transaction. A net after-tax gain of $42 million, or $.33 of diluted earnings per common share, has arisen out of this acquisition. Additionally, the company has reported net gains on investment securities amounting to $51 million, after tax effect, or $.41 of diluted earnings per common share. The first quarter reported net securities gains of $14 million or $.12 of diluted earnings per common share. The second quarter 2010 net income was diminished by net securities losses of $14 million and diluted earnings per common share of $.11.
On August 17, 2011, M&T declared a quarterly cash dividend of $.70 per share on its common stock payable September 30, 2011 to shareholders of record at the close of business on September 1, 2011. The dividend payout ratio is 49%. PE ratio of the company is 10.21. Return on equity of 11.0%. The EBITDA margin is 44.2% and net profit margin is 32.47%. The PE ratios of competitors KeyCorp (KEY) and PNC Financial Services Group Inc. (PNC) are 6.4 and 6.8, respectively.
Kraft Foods Inc. (KFT) - The company has been successful in cutting down significant costs by 4% via its Lean Six Sigma program by increasing margins, boosting marketing and promotions and redirecting expenditure in R&D. The financial results for the second quarter 2011 are impacted by high commodity prices such as coffee.
The results of the second quarter were impacted negatively by the losses arising out of the lost Starbucks (SBUX) business. The key product lines are faring quite well in the North American and European regions, as well as the developing markets.
The company expects the operating EPS to cross a target of $2.25, and the organic net revenue to grow at least 5%. Aggressive cost management and strong revenue growth strategies would ensure solid performance in the next couple of quarters.
The current price of the KFT share is $34.27 with a 52-week range of $29.80 – $36.30. Market capitalization is $60.52 billion with EPS and PE ratio of $1.74 and 19.67, respectively. Return on equity is 7.9%.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.