I could understand how anyone who read my last post, which suggested Defunding the Value Police, might come away with the idea that I’m anti-value, a spokesperson for the dark side. Not so, not at all. I’ve always been about value and still am. What I’m against is naive value, where low ratios are automatically favored with no consideration of the factors that determine a proper P/E: growth and business risk. Viewed in this light, there are perfectly good clear-cut value plays even today. In searching for such ideas today, I came across six that represent a coherent and interesting theme: infrastructure.
© Can Stock Photo / dbvirago
Searching For Buyable Value
I started by screening on Chaikin Analytics for Russell 3000 constituent stocks that are ranked Bullish or Very Bullish under our 20-factor fundamental-technical Power Gauge model. Not every stock that passes muster is a value play (20 factors allows for a lot of variety), so I added the following deal-breaker rules:
- The Price/Sales-including-debt (an Enterprise Value-like figure) factor must be ranked Bullish or Very Bullish.
- The Projected P/E (based on the estimate of Next Year’s EPS) factor must be ranked Bullish or Very Bullish.
The usefulness of the P/S and Projected P/E factors should be obvious. Our scoring is such that stocks passing these tests should satisfy even the more naive value devotees.
Then, I switch gears:
- The Return on Equity Factor must be ranked Bullish or Very Bullish.
Demanding a favorable factor rank for ROE is a good idea given today’s business and market uncertainties. ROE is a good indicator of business risk and stability and one of the determinants of a fair value.
As discussed in my last post, expected future growth is the other - and incredibly important - factor we need to consider in assessing value opportunities. This is
