Being a completely self-taught investor, I still remember the first investment book I ever bought: "The Five Rules of Successful Stock Investing," by Pat Dorsey, at the time director of research at Morningstar. Dorsey and Morningstar espoused a value-based approach modeled partially on the principles of Graham-Dodd and Warren Buffett. As I gained more investment experience, I saw some shortcomings (either in principle or execution) with the Morningstar approach but I still hold the book and the research firm's strategy in high regard, even if the recommendations don't pass muster with my philosophy.
For this latest screen, I screened for stocks rated 5 stars by Morningstar. Currently, 51 stocks receive this highest rating by the firm. Morningstar advocates a value investing approach but how it defines value is a bit amorphous and varies by industry and the specific analyst covering the company. But I thought it would be interesting to see those stocks where Morningstar's value-based strategy agreed with more traditional analyst ratings so I added a second criteria -- stocks must be rated a strong buy (or equivalent) by at least 80% of analysts following the stock. Seven names made the list:
|TICKER||COMPANY||Current Price||Market Cap||Yield||PE||EV / EBITDA|
|F||Ford Motor Co||$12.09||45.951B||0.05 (0.40%) ex-div:"Jan 27"||2.5||10.0|
|GM||General Motors Co||$24.58||38.486B||N/A||5.7||1.7|
|HAL||Halliburton Co||$34.13||31.501B||0.36 (1.03%) ex-div:"Mar 5"||11.4||5.6|
|NIHD||NII Holdings Inc||$17.06||2.920B||N/A||15.0||3.2|
|SVNT||Savient Pharmaceuticals Inc||$1.86||130.9M||N/A||N/A||N/A|
|VNDA||Vanda Pharmaceuticals Inc||$4.51||126.8M||N/A||N/A||N/A|
|WPX||WPX Energy Inc||$18.22||3.619B||N/A||N/A||3.7|
View in-depth financial metrics, including my fair value estimate, in spreadsheet format here.
I was surprised by the results of this screen. Ford and GM may be understandable as "Cinderella" stocks while Halliburton and NII Holdings generate steady if unspectacular free cash flow (FCF) but none of these companies throw off the copious FCF indicative of a companies with desirable economic moats. The most interesting names are the two biotech stocks, SVNT and VNDA. While not purely speculative, they are set to burn through all cash on hand in less than two years at current run rates. These could be considered as lottery ticket plays -- bet a little, win a lot. Both are risky but of the two, VNDA is a little safer since it at least has a big-money partner in Novartis while SVNT tried and failed to auction itself off, suggesting its product is not highly regarded by those in the industry.
Summaries of the stocks follow below.
Ford Motor Company is a producer of cars and trucks and engages in financing vehicle sales. With over $90B in debt, Ford generated ROE of 282% (vs peers' 1%) and ROI of 18% (peers < 1%). Of the big three U.S. automakers, it was the only one to avoid bankruptcy.
General Motors Company develops, produces and markets cars, trucks and parts worldwide and also provides automotive financing services through General Motors Financial Company, Inc. GM generated 28% ROE and 7% ROI vs the industry's 1% and < 1%, respectively. While GM suffers from the stigma of going through bankruptcy, it also benefited greatly from the process, shedding much of its crippling debt and pension obligations. Government holdings of shares may still be dampening investor sentiment, however.
Halliburton Company provides services and products to the energy industry related to the exploration, development, and production of oil and natural gas. HAL outperforms peers with 26% ROE and 17% ROI vs. 9% and 7%, respectively. HAL is generally considered the number two player in the industry behind Schlumberger (NYSE:SLB).
NII Holdings, Inc. provides wireless communication services under the Nextel brand through operating companies located in selected Latin American markets, with its principal operations located in Mexico, Brazil, Argentina, Peru and Chile. Its returns lags the industry: 6% ROE vs 9% and 3% ROI vs 7%.
Savient Pharmaceuticals, Inc. is a specialty biopharmaceutical company focused on commercializing KRYSTEXXA (pegloticase) in the United States and completing the development and seeking regulatory approval outside of the United States for KRYSTEXXA, particularly in the European Union. As a speculative biotech, SVNT has negative returns: -563% ROE and -67% ROI.
Vanda Pharmaceuticals Inc. is a biopharmaceutical company focused on the development and commercialization of products for central nervous system disorders. Products include Fanapt, a compound for the treatment of schizophrenia, and Tasimelteon. While still losing money, VNDA is in much better shape than SVNT with ROE of -28% and -6% ROI.
WPX Energy, Inc. is an independent natural gas and oil exploration and production company engaged in the exploitation and development of long-life unconventional natural gas properties. Return figures are not available.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SVNT, VNDA over the next 72 hours.