Watchlist Wednesday: Value Composite #1

by: Mitchell Mauer

In this edition of Watchlist Wednesday, we highlight five of the top stocks qualifying for the Value Composite #1 screen.

This screen is discussed in the book What Works On Wall Street by Jim O'Shaughnessy.

Value Composite Description

Value Composite #1 is a compilation of multiple value factors. In Jim O'Shaughnessy's research, he found that there was an "ongoing horse race" between which single factors performed the best.

While stocks with the lowest price ratios always ended up as the best investment options, the best performing price ratio continuously changed over various time periods.

This led O'Shaughnessy to build a "master value composite factor" which consistently outperforms any individual metric.

Value Factor #1 is what he calls a "pure play" factor because it only accounts for balance sheet and cash flow metrics. The stocks are equally weighted by the following ratios:

  • Price to Book
  • Price to Earnings
  • Price to Sales
  • Price to Free Cash Flow
  • Enterprise Value to EBITDA

Here is a breakdown of five stocks with the lowest enterprise multiple as found on The Stock Market Blueprint:

  • Valero Energy Corp. (NYSE:VLO) - Valero Energy Corporation operates as an independent petroleum refining and marketing company in the United States, Canada, the Caribbean, the United Kingdom, and Ireland. It operates through two segments, Refining and Ethanol. The company also operates a 50-megawatt wind farm; convenience stores; filling stations, as well as truckstop, cardlock, and home heating oil facilities; and credit card business. Valero Energy Corporation was founded in 1955 and is headquartered in San Antonio, Texas.
    • Price to Book: 1.3
    • Price to Earnings: 7.7
    • Price to Free Cash Flow: 12.7
    • Price to Sales: 0.4
    • Enterprise Multiple (EBITDA): 4.0
    • Combined Rank: 34
  • CenturyLink, Inc. (NYSE:CTL) - CenturyLink, Inc. provides various communications services to residential, business, wholesale, and governmental customers in the United States. It operates through two segments: Business and Consumer. The company offers high-speed Internet services and Ethernet services. As of December 31, 2015, it served approximately 6 million high-speed Internet subscribers and 285 thousand television subscribers; and operated 59 data centers in North America, Europe, and Asia. CenturyLink, Inc. was founded in 1968 and is headquartered in Monroe, Louisiana.
    • Price to Book: 1.1
    • Price to Earnings: 16.3
    • Price to Free Cash Flow: 14.5
    • Price to Sales: 1.0
    • Enterprise Multiple (EBITDA): 5.1
    • Combined Rank: 99
  • Eastman Chemical Co. (NYSE:EMN) - Eastman Chemical Company, a specialty chemical company, manufactures and sells materials, chemicals, and fibers in the United States and internationally. The company operates through five segments: Additives & Functional Products, Adhesives & Plasticizers, Advanced Materials, Fibers, and Specialty Fluids & Intermediates segments. Eastman Chemical Company was founded in 1920 and is headquartered in Kingsport, Tennessee.
    • Price to Book: 1.2
    • Price to Earnings: 9.9
    • Price to Free Cash Flow: 11.1
    • Price to Sales: 1.0
    • Enterprise Multiple (EBITDA): 3.5
    • Combined Rank: 146
  • Wal-Mart Stores, Inc. (NYSE:WMT) - Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Walmart U.S., Walmart International, and Sam's Club. The company operates discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, cash and carry stores, home improvement stores, specialty electronics stores, apparel stores, drug stores, convenience stores, and membership-only warehouse clubs; and retail Websites, such as walmart.com and samsclub.com. It offers grocery products, as well as consumables, and health and wellness products. The company also provides fuel and financial services and related products. In addition, it offers brand name merchandise. As of January 31, 2016, it operated 11,865 stores under 63 banners in 28 countries and e-commerce websites in 11 countries. Wal-Mart Stores, Inc. was founded in 1945 and is headquartered in Bentonville, Arkansas.
    • Price to Book: 2.6
    • Price to Earnings: 13.9
    • Price to Free Cash Flow: 12.8
    • Price to Sales: 0.4
    • Enterprise Multiple (EBITDA): 7.3
    • Combined Rank: 161
  • Target Corp. (NYSE:TGT) - Target Corporation operates as a general merchandise retailer. It offers household essentials, electronics, and apparel. The company also provides food, pet supplies, home furnishings, automotive products, and seasonal merchandise. In addition, it offers in-store amenities, including Target Café, Target Photo, Target Optical, Portrait Studio, Starbucks, and other food service offerings. Target Corporation sells products through its stores; and digital channels, including Target.com. As of January 30, 2016, the company operated 1,792 stores in the United States. Target Corporation was founded in 1902 and is headquartered in Minneapolis, Minnesota.
    • Price to Book: 3.4
    • Price to Earnings: 12.6
    • Price to Free Cash Flow: 9.3
    • Price to Sales: 0.6
    • Enterprise Multiple (EBITDA): 7.2
    • Combined Rank: 166

Implementation

A good way to implement this strategy is by regularly investing equal amounts in the qualifying stocks with the lowest combined rank.