Follow The Money

by: Shiv Kapoor

Last night, there was an article on Bloomberg highlighting how American Mutual Funds were scouring Europe for bargains. They say the SP500 is past its prime. There is no doubt that the SP500 is somewhat expensive. And there is no doubt that Europe is inexpensive relative to SP500. Yet there are plenty of good value opportunities in the US too.

Fund managers have been buying Seadrill (NYSE:SDRL), Total (NYSE:TOT) and Shell (NYSE:RDS.B) in the energy space, Sanofi (NYSE:SNY) and Novartis (NYSE:NVS) in healthcare, Vodafone (NASDAQ:VOD) in the telecom space, Nestle (OTCPK:NSRGY) in the consumer staples space and Credit Suisse (NYSE:CS) in the financial services space. There is much to like in these selections. And all of these stocks can be bought in the US.

Some key indicators (where available) worth looking at for Seadrill, Total and Shell are set out below, together with the same indicators for Statoil (STO), BP (NYSE:BP) and Transocean (NYSE:RIG).

Ahead in this post, I refer to a target rate of return. I calculate the target rate of return as the risk free rate (Rf ) plus beta multiplied by the difference between the market return (Rm ) and the risk free rate, assuming that the ten year treasury currently yielding about 2.88% represents the risk free rate, and a 9% represents the very long term return from the market [Rf + Beta * (Rm - Rf)].

Shell is attractive. It offers a decent dividend yield and decent value, particularly after considering the low beta of 0.69. If we assume that the ten year treasury currently yielding about 2.88% represents the risk free rate, and a 9% represents the very long term return from the market, a stock with beta of 0.69 ought to deliver a target rate of return of 7.1%. Shell as priced can be expected to outperform this level of return. I have long positions in Shell.

Total is also attractive, particularly on a forward earnings basis. Yet I am not keen on the company. Given its beta of 1.14, the target very long term return expectation should be 9.86%, which I do believe are on the table with the stock priced as it is, but Total also suffers from jurisdictional issues; France today is far from an investor friendly country - and that is a risk I do not want to carry at present.

Statoil is cheap. Its dividend yield is attractive, though less so than Shell or Total. But then it has firm growth opportunities ahead, so retention of profits to invest in growth makes sense. This company has a beta of 1.09. It ought to indicate a target very long term return potential of 9.55%. And, as priced it is likely to do so.

BP is also well priced. But like Total it has a forward PE higher than current PE, which makes me uncomfortable. In addition there is the overhang of the Macondo incident. And then I have mixed feelings about its association with Rosneft. On the one hand Rosneft provides a great long term growth opportunity in a market where production growth can be expected to get more challenging. But that growth opportunity comes at the cost of jurisdictional issues; I think recent history has indicated governance in Russia is terrible insofar as it relates to minority shareholders. Despite my reservations, I have old long positions in BP.

Seadrill is a solid company with a hugely attractive dividend yield. It is not a company I like as priced because I am wary of investing when earnings in the forward year is expected to decline. I do not like the fact that forward PE is higher than the PE. Additionally, with a beta of 1.59, the stock should offer a target very long term return expectation of 12.61%, which I do not believe are on the table with the stock priced as it is.

Transocean is a past employer. I have full confidence in the management. I like the dividend and I like the stock. This company has a beta of 1.15. It ought to indicate a target very long term return potential of 9.92%. I believe with the stock as priced, the very long term return potential on offer is in excess of 11.5%. I have long positions in Transocean.

In the healthcare space, in addition to Novartis and Sanofi, it's worth having a look at a closer look at Liberator Medical (NYSEMKT:LBMH), St. Jude Medical (NYSE:STJ), Taro Pharmaceutical (NYSE:TARO), Jazz Pharmaceuticals(NASDAQ:JAZZ), WuXi Pharma (NYSE:WX) and Celgene (NASDAQ:CELG). These stocks offer a decent mix of value, growth and momentum, through some would say wait and watch because the momentum has been strong. Questcor Pharmaceuticals (QCOR) is another stock to watch. It has a nice mix of value and growth, but momentum has been ugly.

In the telecom space, it is Vodafone that enjoys fund interest. I'd have to say I like Vodafone too. But the funds are joining the party late. China Mobile (NYSE:CHL), Leap Wireless (LEAP), RigNet (NASDAQ:RNET) and Ubiquiti Networks (NASDAQ:UBNT) are worthy of a closer look. China Mobile could be very interesting as its 4G service rolls out and it could get far more attractive with an iPhone tie up to drive gains to market share; it is a decent value opportunity. Ubiquiti Networks and RigNet offer solid growth potential with the latter enjoying positive momentum. Leap Wireless offers a great mix of growth, value and positive momentum.

And then we have Nestle in the consumer staples space. I like Nestle, but prefer Unilever (NYSE:UL). Outside of these two, a closer look at G. Willi Food - International (NASDAQ:WILC) and Walmart (NYSE:WMT) may be warranted for those hunting for hidden value in the consumer staples space. No data is presented for Nestle since it's a pink sheets stock and the data in this format is not easy to come by.

And lastly there is Credit Suisse in the financial services arena. I don't like Credit Suisse because with Switzerland allowing probing government's access to its banks, they will face headwinds. I'd rather look at Bank of America (NYSE:BAC) which has a decent mix of value and growth backed by positive momentum. And Banco Latinoamericano de Comercio Exterior (NYSE:BLX) is another with decent value, reasonable growth and positive momentum.

All of this post is about throwing out ideas. Be sure to dig deep and do your due diligence before acting.

Disclosure: I am long RDS.B, RIG, WMT, BP, UL, VOD. 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.