3 Selected 'Strong Buys' From S&P

Includes: AAPL, DFS, VLO
by: Bret Jensen

It is getting harder and harder to find value in this levitating market. Multiples continue to expand on the back of an overly accommodative Federal Reserve, even as revenues for S&P companies came in slightly negative year over year during first-quarter earnings reports. Earnings grew just over 3% year over year as well. I ran a screen this morning to see what I could find as far as equities that still look as if they have good value here in this overbought market. My criteria to find these stocks were as follows: 1) under 12x earnings, 2) a five-year projected PEG of under one, 3) at least a 1.5% dividend yield, and 4) the highest rating "Strong Buy" from S&P. Only three names popped up using these criteria. Two already are in my portfolio. All three are profiled below.

Valero (NYSE:VLO): The largest North American refiner has been in my portfolio for over a year. Analysts consistently underestimate Valero's earnings power. The company has easily beat against bottom-line expectations for five straight quarters. The average beat over consensus over this time frame is ~18%. The stock is cheap at just over 7x trailing earnings and under 5x current operating cash flow. VLO has a five-year projected PEG of under one (.82) and pays a dividend of 1.9%. Given its low payout ratio (~15%) and prodigious cash flow, I would look for payouts to increase substantially in the future. The company continues to unlock shareholder value. It just spun off its retail assets and is now considering putting its logistical and transportation assets into MLP form, which would unlock further shareholder value.

Discover Financial Services (NYSE:DFS): This payment service and card provider gets relatively little coverage by the press, but is an over $20 billion market capitalization company. Consensus earnings estimates for both FY 2013 and FY 2014 have moved up nicely over the past two months. The stock pays a 1.7% dividend and has a low payout ratio (~18%). The dividend recently was increased over 40% and I would look for significant additional increases in the coming years as the company continues to recover from the financial crisis. The company also has a $2.4 billion repurchase program in place (~10% of float at current prices). Discover is managing its business well as 30-day delinquencies are at a record low, and its net interest margin rose 30bps to 9.39% during the first quarter. The stock has a five-year projected PEG of just under one (.99) and sells for under 11x trailing earnings.

Apple (NASDAQ:AAPL): One of the cheapest large-cap stocks in the market right now, AAPL has a minuscule five-year projected PEG (.52). The Cupertino giant plans to return ~$100 billion to shareholders through FY 2015 via dividend payouts and stock repurchases, which should put a nice floor under the stock. The shares yield a solid 2.8% and AAPL sells for just over 10x forward earnings (under seven, if one subtracts its cash hoard on the balance sheet). Analysts expect sales to increase at ~10% CAGR over the next two years and the mean price target on AAPL by the 48 analysts who cover the stock is north of $540 a share, ~$100 over its current stock price. Apple got some good news when Morgan Stanley came out today saying it now estimates 31 million iPhones will be sold in the June quarter. This is significantly above its previous estimate of 26 million iPhones and the current street consensus of 27 million.

Disclosure: I am long AAPL, VLO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.