The following are the securities that were in downtrend for most of the last 30 days and of late are showing signs of turnaround based on technical criteria. These securities are evaluated using the following fundamental valuation criterion:
Company earnings are very closely followed by many investors. Discounted earnings model is a popular model to estimate the worth of a company. The amount of future earnings from the business is estimated for each forecast period and discounted at the appropriate discount rate to determine their present value. The present value of each period of estimated earnings for all future years are then added to determine the total present value.
The last step determines the perpetual value. It's the residual value of the business at the end of the period of years being estimated. This value is discounted to its equivalent present value and added to the present value of the future earnings to determine total intrinsic value. Some investors like adding the book value to this number; we intentionally eliminated the book value as we are evaluating the companies based on earnings power. This model is commonly used to price IPO's and to evaluate company's worth in a M&A scenario.
A rule of thumb for stock valuation that is popular on Wall Street is to calculate the sum of the expected growth rate of a stock's earnings plus its dividend yield and divide this by its P-E ratio. The higher the ratio, the better, and the famed money manager Peter Lynch recommends investors select stocks with a ratio of 2 or higher and to avoid stocks with a ratio less than 1.
The following is the list of top seven attractive turnaround companies in S&P 500 valued based on both the above criteria.
*We assumed a discount rate of 12% and the growth will stabilize after the next 5 years and enter a constant phase.
Click graphic to enlarge:
Southwest Airlines Co (NYSE:LUV): Southwest Airlines Co. operates as a passenger airline that provides scheduled air transportation in the United States. Southwest operates more than 3,400 flights a day, as of March 2011, utilizing a fleet of 552 aircrafts. The company has a Return on Assets (ROA) of 2.9% and a Return on Equity (ROE) of 7.5%. The company is trading with a Return on Invested Capital (ROIC) of 4.8%. The stock is expected to earn $1.02 per share next year. The stock is expected to grow at .97% over the next 5 years. The company is valued at $9.4 using the Discount Earnings Model (DEM). The company has a sum of growth and yield to PE ratio (GY2PE) of .12. LUV is currently trading at $8.45, raising $0.04 or 0.48% this year. The current price is at 10% discount levels when compared to its earning power.
DeVry Inc (DV): DeVry Inc. is a provider of educational services and the parent organization of Advanced Academics, Becker Professional Education, Carrington College and Carrington College California, Chamberlain College of Nursing, DeVry Brasil, DeVry University and Ross University. The stock has a ROA of 18% and a ROE of 27.2%. The stock is trading with a ROIC of 26.7%. DV is expected to earn $3.51 per share next year. The company is expected to grow at 5.23% over the next 5 years. The company is valued at $36.7 using DEM. The company has a GY2PE of .60. DV is currently trading at $35.61, falling $3.2 or 8.2% this year. DeVry is trading near its fair value.
MBIA Inc (NYSE:MBI): MBIA Inc. and its subsidiaries provide financial guarantee insurance and related reinsurance, advisory, and portfolio services, as well as investment management services to public finance and structured finance markets. The company has a ROA of 0.2% and a ROE of 1.9%. The company is trading with a ROIC of .4%. The stock is expected to earn $0.24 per share next year. The company is expected to grow at 38.76% over the next 5 years. The company is valued at $5.5 using DEM. The company has a GY2PE of 2.24. MBI is currently trading at $10.14, falling $2.4 or 19% this year.
Electronic Arts (NASDAQ:EA): Electronic Arts Inc. develops, markets, publishes and distributes game software and content for video game consoles, personal computers, mobile phones, tablets and electronic readers, hand held game players and the Internet. It markets its products through mass market retailers, electronics specialty stores, game software specialty stores and online stores. The company has a ROA of -8.2% and a ROE of -16.0%. The company is trading with a ROIC of -16.0%. The stock is expected to earn $1.24 per share next year. The company is expected to grow at 14.06% over the next 5 years. The company is valued at $11.6 using DEM. The company has a GY2PE of .74. EA is trading at $17.32, higher than its earning power.
AK Steel Holding Corp (NYSE:AKS): AK Steel Holding Corporation is a producer of flat-rolled carbon, stainless and electrical steels and tubular products through its wholly owned subsidiary, AK Steel Corporation (AK Steel). It manufactures flat-rolled carbon steels, including coated, cold-rolled, and hot-rolled products; and specialty stainless and electrical steels that are sold in hot band, and sheet and strip forms. The company has a ROA of -3.1% and a ROE of -16.9%. AKS is trading with a ROIC of -9.3%. The company is expected to earn $1.32 per share next year. The stock is expected to grow at 9.97% over the next 5 years. The stock is valued at $14.6 using DEM. The company has a GY2PE of 1.60. AKS is currently trading at $7.90, falling $0.67 or 7.8% this year. AKS is trading at 84% discount levels when compared with its earning power.
New York Times Co A (NYSE:NYT): The New York Times Company is a diversified media company that includes newspapers, digital businesses, investments in paper mills and other investments. NYT publishes two national and 16 regional newspapers. The stock has a ROA of 3.4% and a ROE of 17.0%. The company is trading with a ROIC of 7.1%. NYT is expected to earn $0.61 per share next year. NYT is expected to grow at 1.96% over the next 5 years. The company is valued at $6.0 using DEM. The company has a GY2PE of .18. NYT is currently trading at $6.79, falling $0.98 or 13% this year.
Frontier Communications Corp (NASDAQ:FTR): Frontier Communications Corporation is a communications company providing services predominantly to rural areas and small and medium-sized towns and cities. The Company offers a variety of voice, data, Internet, and television services and products, some that are available a la carte, and others that are available as bundled or packaged solutions. The company has a ROA of 1.2% and a ROE of 5.5%. The company is trading with a ROIC of 1.6%. The stock is expected to earn $0.25 per share next year. The company is expected to grow at 17.25% over the next 5 years. The company is valued at $3.3 using DEM. The company has a GY2PE of 1.92. FTR is currently trading at $4.27, falling $1.1 or 20% this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.