The price-to-earnings (P/E) ratio is probably the financial metric most well-known to investors and forms the basis of this screen. While useful as a shorthand method for screening for cheap stocks, P/E ratio is also one of the most malleable metrics investors can use. Between cyclical business cycles and accounting massaging, earnings figures (the denominator in the P/E) can mislead investors. Thus in addition to requiring a low forward P/E, I added the following criteria:
- Must be traded on a major US exchange
- Market cap > $1B
- Revenue growth % in most recent year (mry) > 0
- Operating income growth % (mry) > 0
- Net income growth % (mry) > 0
- EPS growth % (mry) > 0
- EPS estimate for next year must be positive
- Dividend yield >= S&P 500
- Payout ratio < 60
Many low P/E stocks are cheap for a reason, so adding the revenue and income growth requirements is an attempt to find cheap but solid companies that are still doing good business. To further narrow the field and in keeping with my income strategy, I added the dividend restrictions. 21 stocks made this list (prices as of Apr 25th, 2012):
|STOCK||COMPANY||Current Price||PE||PEG||EV / EBITDA||Payout Ratio|
|CVX||Chevron Corp (CVX)||$103.77||7.7||1.4||3.8||23%|
|DE||Deere & Co (DE)||$81.46||12.0||0.9||10.8||23%|
|ETN||Eaton Corp (ETN)||$48.77||12.3||1.1||8.7||35%|
|XOM||Exxon Mobil Corp (XOM)||$86.65||10.3||1.5||5.9||22%|
|FCX||Freeport-McMoRan Copper & Gold Inc (FCX)||$37.31||9.2||1.8||4.2||37%|
|HRS||Harris Corp (HRS)||$44.80||10.2||3.9||6.0||25%|
|HUN||Huntsman Corp (HUN)||$14.33||13.7||0.5||6.0||40%|
|IP||International Paper Co (IP)||$33.56||10.7||1.8||5.6||32%|
|JCOM||j2 Global Inc (JCOM)||$25.46||10.4||1.0||6.7||17%|
|KSS||Kohl's Corp (KSS)||$49.71||11.5||0.8||5.2||23%|
|KRO||Kronos Worldwide Inc (KRO)||$22.76||7.9||1.1||4.9||39%|
|MANT||ManTech International Corp (MANT)||$31.89||8.7||1.2||4.5||23%|
|MRO||Marathon Oil Corp (MRO)||$29.25||7.1||0.9||3.8||19%|
|NYX||NYSE Euronext (NYX)||$26.91||11.3||1.0||7.3||51%|
|OXY||Occidental Petroleum Corp (OXY)||$90.15||10.6||0.9||5.3||22%|
|OLN||Olin Corp (OLN)||$21.78||7.2||1.1||6.1||27%|
|SPLS||Staples Inc (SPLS)||$15.38||10.9||1.1||5.4||29%|
|STLD||Steel Dynamics Inc (STLD)||$12.77||13.3||0.8||6.6||42%|
|WOR||Worthington Industries Inc (WOR)||$18.04||10.9||1.5||11.1||28%|
|XRX||Xerox Corp (XRX)||$7.97||8.8||1.0||5.8|
A fair number of commodity stocks made the list, which is not surprising as the market commonly discounts capital intensive industries like energy, mining and metal stocks. International Paper was the most intriguing name to these eyes as it looks quite cheap on a free cash flow basis though its reasonable 5.6x EV/EBITDA masks its somewhat high debt load that stands at 2.7x debt-to-EBITDA. ManTech also looked cheap on FCF though that is common with many defense companies; a 15% short interest suggests further research is warranted before wading in. Summaries of all the stocks in the list follow below.
Chevron Corporation engages in petroleum operations, chemicals operations, mining operations, power generation and other energy services. A giant in the industry, CVX delivered 24% ROE and 16% ROI, besting peers' 10% and 7% averages.
ConocoPhillips, like CVX, is an international integrated energy company with upstream and downstream segments such as exploration & production, midstream, refining and others. Its returns vs. the industry were not available.
Deere & Company operates in three business segments: agriculture and turf, construction and forestry and credit. DE delivered stellar ROE of 42% (vs peers' 15%) but its ROI of 9% was in-line with peers.
Eaton Corporation is a diversified power management company operating in areas such as electrical components and systems for power distribution and control; hydraulics components, systems and services for industrial and mobile equipment, among others. ETN generated 17% ROE and 10% ROI, handily beating industry averages of 6% and 5%, respectively.
Exxon Mobil Corporation is one of the largest energy companies in the world, but is also a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. XOM's returns of 27% ROE and 18% ROI illustrates why investors consider the company to be best-in-class among big oil stocks.
Freeport-McMoRan Copper & Gold Inc. is an international mining company. FCX is one of the largest copper, gold and molybdenum mining companies in terms of reserves and production. Its portfolio of assets includes the Grasberg minerals district in Indonesia. The company generated 26% ROE and 19% ROI, outpacing peers' 10% ROE and 9% ROI.
Harris Corporation is an international communications and information technology company serving government and commercial markets in more than 150 countries. The company operates in three segments: RF Communications segment, Government Communications Systems segment and Broadcast. Returns vs. its industry look favorable at 23% ROE (vs 3%) and 12% ROI (3%).
Huntsman Corporation is a manufacturer of differentiated organic chemical products and of inorganic chemical products. HUN posted 14% ROE and 4% ROI, vs peers' 7% ROE and 4% ROI.
International Paper Company is a global paper and packaging company, with primary markets and manufacturing operations in North America, Europe, Latin America, Russia, Asia and North Africa. The Company operates in four segments: Industrial Packaging; Printing Papers; Consumer Packaging, and Distribution. IP delivered returns of 19% ROE (vs. peers' 8%) and 5% ROI (vs. peers' 5%).
j2 Global, Inc., formerly j2 Global Communications, Inc., provides cloud services such as online fax, virtual phone systems, hosted e-mail, e-mail marketing, online backup and customer relationship management. Returns of 23% ROE and 21% ROI look stellar but the stock shows a 33% short interest so it appears some investors don't expect these results to continue.
Kohl's Corporation operates family-oriented department stores that sells apparel, footwear and accessories for women, men and children; soft home products, such as sheets and pillows, and housewares. KSS appears to be a leader in its industry, with 16% ROE and 10% ROI easily besting peers' 6% and 4% returns.
Kronos Worldwide, Inc. is a global producer and marketer of titanium dioxide pigments, a base industrial product used in a range of applications. The Company, along with its distributors and agents, sell and provide technical services for its products. Returns look good at 38% ROE (vs. peers' 7%) and 22% ROI (vs. 4%) but the KRO looks like a battleground stock with over 80% insider-ownership and 20% short interest.
ManTech International Corporation is a provider of technologies and solutions for mission-critical national security programs for a number of federal agencies like the intelligence community; departments of Defense, State and Homeland Security; the Department of Justice and the Federal Bureau of Investigations (FBI) among others. MANT returns lag the industry with ROE of 13% vs competitors' 24% and 10% ROI vs. competitors' 22%.
Marathon Oil Corporation is an international energy company engaged in exploration and production, oil sands mining and integrated gas with operations in the United States, Angola, Canada, Equatorial Guinea, Indonesia, the Iraqi Kurdistan Region, Libya, Norway, Poland and the United Kingdom. MRO posted returns of 8% ROE and 5% ROI, slightly behind industry averages of 10% ROE and 7% ROI.
NYSE Euronext is a global operator of financial markets and provider of trading solutions. The Company offers an array of products and services in cash equities, futures, options, swaps, exchange-traded products, bonds, clearing operations, market data, commercial technology solutions and carbon trading. NYX generated 9% ROE (vs industry's 3%) and 5% ROI (vs 3%).
Occidental Petroleum Corporation conducts its operations through various subsidiaries and affiliates. The Company operates in three segments: oil and gas segment; chemical segment, and midstream, marketing and other segment. With 19% ROE and 13% ROI, MRO handily outpaced competitors' 10% ROE and 7% ROI.
Olin Corporation is a manufacturer concentrated in two business segments: Chlor Alkali Products and Winchester. OLN's 27% ROE diverges from its 13% ROI as the industry averaged a higher ROI of 19% but a lower 18% ROE.
Staples, Inc. is an office products company with three business segments: North American Delivery, North American Retail and International Operations. As of January 28, 2012, the Company served businesses of all sizes and consumers in North America, Europe, Australia, South America and Asia. Returns of 14% ROE and 10% ROI shows the company struggling to meet the industry's average ROE of 23% and 15% ROI.
Steel Dynamics, Inc. is a steel producer and metals recycler in the United States, with three segments: steel operations, metals recycling and ferrous resources operations, and steel fabrication operations. STLD posted good numbers in a tough industry: 10% ROE and 4% ROI besting peers' 1% ROE and ROI figures.
Worthington Industries, Inc. is a diversified metals processing company, focused on steel value-added steel processing and manufactured metal products. WOR operates in three segments: Steel Processing, Pressure Cylinders and Metal Framing. It generated stellar returns vs. the industry: 17% ROE and 11% ROI vs. 1% ROE and ROI for competitors.
Xerox Corporation provides a portfolio of business process and information technology outsourcing support, document technology and solutions. I have written bullish articles in the past about XRX and remain positive on the stock. XRX has a fairly high debt load, which allowed it to post industry-beating 10% ROE even as its 5% ROI lagged peers' 6% return.
Disclosure: I am short XRX naked puts.