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Owen Bernard
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  • 4 Stocks Expected To Yield Better Returns Than U.S. Treasuries, Tier 3 Grouping 0 comments
    Jul 24, 2011 10:12 PM | about stocks: STO, AAP, ENH, E

    "O enviably fortunate Investors, if only you realized your current advantages!" - Benjamin Graham

    If you had a choice of buying a U.S. Government bond yielding .69% for the 3-year treasury to as high as 4.31% for the 30-year treasury or equity earning yields of 5% or better, What would you choose?

    Below is a list of companies that seem to be better options than what your bank and U.S treasuries can offer you. What they all have in common? With history as a guide, the list of companies have an earnings yield of 5% or higher allotting a high probability of generating those returns over a three to ten year time frame. The end goal here was to derive an expected earnings yield considering various events and to weigh those expectations against the risk free rate, U.S. treasuries.

    35. STATOIL ASA (NYSE:STO) is an integrated energy company that is primarily engaged in oil and gas exploration and production activities.Expected Earnings Yield: 5.54%

    Trading at nearly 3 times tangible book value, there appears to be some measure of competitive advantage attributed to the company. With returns and margins ranging around the trough and the average of the industry cycle, the downside seems to be a bit limited but mind you this is only a cursory look at the company. Historically, the returns for the company have been great aside from the abnormal period in 2008 and 2009 where prices were highly volatile in the commodities market.

    36. ADVANCED AUTO PARTS INC (NYSE:AAP) is a specialty retailer of automotive aftermarket parts, accessories, batteries and maintenance items primarily operating within the United States.
    Expected Earnings Yield: 5.20%

    Trading at nearly 5 times book value, AAP appears to have a huge competitive advantage that keeps new entrants to the industry at bay. The level of certainty in revenue and earnings seem to be as close to risk free as possible and factor in potential growth especially with their new concept business being test marketed, the expected yield seems to understate realist. With U.S. equity markets being slightly overpriced, any drop in price for this stock would find me to be a large buyer of the company's stock.

    37. ENDURANCE SPECIALTY (NYSE:ENH) writes lines of insurance and reinsurance that require dedicated, specialized underwriting skills and resources in order to be profitably underwritten on a global basis. World catastrophes are at an all time high. The most recent being the Tohuko, Japan earthquake and tsunami; Christchurch, New Zealand earthquake and floods experienced in Queensland, Australia which impact their first quarter earning. Despite these sort of "black swan" events the company remains intact to better help people and their country's.
    Expected Earnings Yield: 15.24%

    Trading at a deep discount to book value, 30%, the stock price is not exemplifying the true value of the company. A famous investor known for purchasing baskets of insurance companies at a discount to book value was Shelby Cullom Davis. With the approach being a success, I don't see why concentrating on a single insurance company of this type to be a bad investment given the company's ability to weather the storm . Management seems to be of a conservative nature and despite my opinion of the interest rates for U.S. Treasuries, the mix of fixed maturity investments is relatively sound.

    38. ENI SpA (NYSE:E) is a major integrated energy company, committed to growth in the activities of finding, producing, transporting, transforming and marketing oil and gas. Public sentiment for the company is relatively low compared to the industry and equity markets overall.
    Expected Earnings Yield: 6.67%

    Trading roughly 50% above tangible book value, the company is able to earn descent returns on capital, 12%, and equity, 14%, which should should contribute to the sustainability of current earnings. Growth is not being priced in for this global player considering world sentiment over sovereign debts and various macroeconomic risk being factored into the stock price. Analysts are averaging a $5.32 consensus for year-end earnings. Great write up on the TheStreet.com:
    http://www.thestreet.com/story/11190036/7/10-energy-stocks-with-upside.html

    The first set of companies from the third tier group have one other factor that is not considered which has been somewhat of an uncelebrated attribute in value investing. Dividends are a way of being paid to wait for prices to converge with respective values. In our case, all of the above mentioned companies, are paying you to wait for management to prove themselves capable stewards of your companies' business practices. I enjoy being paid to wait on sound investments and would not fret at a price decline in these particular business so long as a well developed thesis on the invested remains viable.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in STO, AAP, ENH, E over the next 72 hours.

    Stocks: STO, AAP, ENH, E
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