How to find stocks that are cheaper than the S&P?
I use a screener setting that helps me to find stocks with ratios lower than those of the S&P 500 on Finviz.com. I set up P/S below 2, P/B below 3, P/E below 20 and P/FCF below 15. I then add criteria of positive EPS growth in the past 5 years, next year, next 5 years and this year, as well as positive sales growth for the last 5 years. I run it against either the whole database or only against the S&P 500 index itself. Then, I use my secret sauce: a personalised setting of a KST indicator to divide the hits between those with increasing upward momentum and those going lower or flat. This indicator is not available on Finviz - I am using the settings on the platform of my broker, a purely manual job, so it takes some time and judgement to make the selection.
Leaders for August
Find below the list of the companies which, in my judgement, have a high chance of growing in months to come. They present strong fundamentals, therefore I recommend them as long-term investments which you could buy now on sale. I ordered the companies by market cap. The first three companies belong to the S&P 500.
The reasons why you should consider these companies
Cigna Corporation (CI): This healthcare plan provider has experienced for the last 10 years a steady increase of revenues, at an annual rate of nearly 10%, and a growth of net income at an annual rate of nearly 25%. It is trading at ratios lower than its 5-year averages.
As the chart below indicates, Cigna has been also outperforming the S&P, providing over 400% return for the last 10 years. The green line indicates net income (Q).
Synchrony Financial (SYF): This consumer financial services company has experienced a nice growth rate of revenues and net income, with a 5-year average of 8.15% and 11.1% respectively, with sales growth in similar ranges for the last 5 years.
It has not outperformed the S&P 500 since the IPO in 2014, but is expected to grow annually at an 11% rate for the next 5 years. It is trading at ratios lower than its 5-year averages.
Beige line on the chart below - revenues (Q), purple line - net income (Q).
Universal Health Services, Inc. (UHS): This owner and operator of acute care hospitals, behavior health centers, surgical hospitals, ambulatory surgery centers, and radiation oncology centers has been achieving a healthy and steady growth of revenues, net income, book value per share and operating cash flow. Its 10-year average growth rates for revenues and net income are currently 7.93% and 14.61% respectively. It is trading at ratios lower than its 5-year averages.
For the last 10 years, it has outperformed the S&P 500, delivering nearly a 400% return, against a 237% return of the index.
Santander Consumer USA Holdings Inc. (SC): This specialized consumer finance company, which provides vehicle finance and third-party servicing in the United States, has had a bit choppy revenues and income growth, however the 5-year averages are still positive (9.57% and 5.6% respectively), while analysts expecting the EPS to grow at a 6.2% rate for the next 5 years.
Although it has underperformed the S&P 500 since its IPO in the beginning of 2014, in the last 2 years, the stock of Santander Consumer USA Holdings Inc. has outperformed the index 82% to 21%. It is somehow reflected in its valuation ratios, which are above the company’s 5-year averages.
On the chart below, the green line represents revenues (Q).
CACI International Inc. (CACI): The company offers business systems solutions in the areas of financial, human capital, asset and materials, and administrative management. It has had a steady growth rate of revenues and income for the last 10 years (6.2% and 10.7% respectively), though the real acceleration of the revenue came in the last 3 years. This has also been showing in the price action. Although the stock has outperformed the S&P 500 for the last 10 years (353% to 237% return respectively), in the last 3 years, the spread of returns got even wider in favour of CACI (114% vs. 39%). CACI P/S and P/Cash Flow ratios are currently lower than the 5-year averages.
OneMain Holdings Inc. (OMF): This consumer finance company has shown high growth of revenues in the last 5 years (average rate 32%), although the net income growth has been more choppy. The stock outperformed the S&P 500 in the last 2 years (41% vs. 21%), but underperformed the index on the scale of the last 5 years (15% vs. 57%). Still, analysts expect the EPS to grow at rate 8.4% for the next 5 years and the stock has been upgraded a couple of times this year. It is also trading at ratios lower than its 5-year averages.
MasTec, Inc. (MTZ): This infrastructure construction company, providing engineering, building, installation, maintenance, and upgrade services for communications, energy, utility, and other infrastructure, has been experiencing an enviable growth of revenues, operating and net income. Its 10-year averages are 17.5%, 19.2% and 14.7% respectively. This year alone the stock returned nearly 50%. In the last 10 years, it has beaten the S&P 500 with the return of 518%.
The analysts are expecting it to grow by nearly 10% annually for the next 5 years.
I believe the seven companies described above are really interesting opportunities. They are fundamentally strong and seem to be at their lower valuation ends. My favourites are MasTec and CACI International. Of course, there are more companies that meet the screening criteria and are attracting attention of investors. I am presenting here only a sample. I am using many other screens and sources of ideas. However, since some time I have been trying to slightly "time" the investment to avoid entries when all the red flags are there, fundamentally and technically. For this purpose, I am using very long-term charts of KST, money flow, and a couple of other indicators that allow me to judge if this is a right time to jump into the boat. I hope you enjoyed this article and I will welcome your comments if you are either invested or planning to invest in any of them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.