Keeping it simple often pays. I tried a preliminary screen with the following criteria:
- Large cap ($10B+)
- Trading below book value
- 5 years of positive earnings growth
- 5 years of positive revenue growth
My screener gave me fewer than 20 results. Of those, I got four I'm interested in:
- MetLife, Inc. (NYSE:MET)
- CME Group Inc. (Chicago Mercantile Exchange) (NASDAQ:CME)
- Corning Inc. (NYSE:GLW)
- JPMorgan Chase & Co.(NYSE:JPM)
I currently own none of the above, but I have gotten to the point of valuation on two of them, so naturally I thought this screen did a pretty good job mirroring my previous research interests.
Commentary and How to Trade
A 2.4% dividend yield, lower than 15% payout, and a defensible brand make this a nice income play. The valuation definitely makes you think, with earnings yielding around 17% and selling for almost half of book value. It has grown EPS 11.71% over the past 5 years and Sales 10.36% over the past 5 years.
Interest rates are going to stay lower for far longer than most people think. The global deleveraging process will not be done in a couple years, or even 5, even 10 is optimistic, it will likely take a couple decades as the percent was set with the first depression. This doesn't make me a bear on the global economy - people will make money in other areas - but life insurance is probably going to be one of the harder places to do so. I would consider adding it as a core long-term income holding, but only if your portfolio is underweight financials and doesn't already have an insurance name.
CME Group Inc. (Chicago Mercantile Exchange)
A 3.2% dividend yield, 39% payout ratio, and a position as essentially a toll collector for derivatives and other financial contracts is an interesting investment proposition. It is priced well within it's reasonable range and sells at a slight discount to book. For a company with this kind of a moat (especially in a growing complex industry), it should certainly trade at a premium. It has fantastic margins, grows very solidly, though it recently slipped on both the top and bottom line quarter over quarter.
As rates go up, the company will make more money on hedging contracts and overall activity. I think this would make an excellent investment similar to MET. Of the two, I think MET provides a larger margin of safety in a less complex industry. Though if you can get CME closer to $250, it's a great addition to any portfolio. This is a good introductory article on how to trade CME and here is a more recent article on why it currently has an attractive entry point.
A dividend yield of 2.3% and a payout of 16% is perfect with one of the lowest valuations out there for necessarily a manufacturer and one with as long a history as Corning has. It is profitable, has been growing, and seemingly has no reason to be trading at these levels. All this being said, I worry that it is a value trap. I bought Hewlett-Packard (NYSE:HPQ) on the transition from printers to software and it has been my worst trade in the past two years. Since then I've been skeptical of pristine valuations combined with superior growth track records in the manufacturing/technology industries. I would not recommend Corning to investors. Although speculators may make significant gains on it, it cannot be acceptable to an investor, given the inherent risks. Jae Jun does a fantastic overview of the company and the stock.
JPMorgan Chase & Co.
Buy when there is blood in the streets - it's that simple, yet no one can seem to do it. As soon as the news came out I started licking my chops - Buffett has said that besides Wells, he only really likes JPM. Now he has put his money in USB (NYSE:USB) before and has supported Bank of America Corporation (BAC), but I think his words are meaningful nonetheless. You're getting it at 75% of book - it should trade at about 1.5x in any environment. I don't like Dimon, but you can't argue with his track record.
I also think American International Group Inc (AIG) is a much better contrarian financial-behemoth value story and BAC at $6 is also a better risk-reward, but if you can get JPM at 60% or even 65% of book, it's probably one of the best trades you can make in this market. But once you've enjoyed the ride up, my guess is panic will flood back into the story - so take a 20% profit and be on your merry way.