"There are many stocks that are dirt cheap by just about any measure. For value investors, it is like a kid in a candy shop. Our picks are: BP (BP), France Telecom (FTE), CBS (CBS) and Pfizer (PFE)."
When investors were busy congratulating themselves a year or so ago for maintaining attractive portfolio gains, Director of Zacks Equity Research Dirk van Dijk, CFA was telling us that the mortgage market numbers were eventually no longer going to hold, and thus the economic outlook was worse than most of us thought. But can he provide a silver lining now that most of us can only see the dark clouds?
Can you tell us something simple that will assuage our fears about being in the stock market at the present time?
I think I can. Here goes: Do you really think that
Exxon (XOM) is going to go out of business, regardless of how bad the economy gets? Or do you think that they will be able to take all that cash that has been building up on their balance sheet and put it to work, scooping up bargains and coming out the other side stronger than ever? Is it more likely to cut its dividend or increase it over the next five years?
Exxon is trading for 7.5x this years expected earnings and has a dividend yield of 2.4%, and it is one of the more expensive names in that group. Take one step down and look at Conoco (COP) is at just 4.3x this year's earnings and is yielding 3.5%.
It's not just in the Big Oil companies, either -- take a look at some of the drug companies. Are things really going to get so bad that people with high cholesterol stop taking Lipitor? I honestly doubt it. Yet Pfizer (PFE) is going for just 6.6x this years earnings and is yielding almost 8%.
Interesting. Is there a general principle you are following here?
In times like these, sometimes it is best to just go back to the basics of investing. Buy large, well-established companies at very cheap valuations that will pay you to wait until things recover. I have compiled a list of stocks, all with current market capitalizations above $6.5 billion, trading for less than 7x next year's estimated earnings and which are yielding more than 7%.
Are there particular industries you have screened out, such as Financials?
I eliminated all finance companies from the list, simply because without mark-to-market accounting, I do not trust the numbers from any of them. Also, all companies rated 4 or 5 on the Zacks Rank (sell or strong sell) were eliminated from consideration.
So what stocks are on this list?
I would first of all stress that this is simply a starting point for further investigation, not a recommendation to go out and buy all of these stocks. However, it does appear at first glance that Mr. Market is simply giving these names away.
These are some of the household-names associated with this list: CBS (CBS), France Telecom (FTE), Pfizer (PFE) and BP (BP). None of these companies are in danger of going out of business soon, and they are all trading at modest next-year P/Es with solid dividend yields.
In fact, CBS and FTE currently offer yields north of 10%, and offer products that consumers cannot easily cut from their budgets. And none of these companies are trading right now at a price-to-book multiple of higher than 1.59. So these are very conservative equities to buy, as well.
There are countless examples like this. Can I guarantee that they have hit their low tick? Of course not. However, there are many stocks that are dirt cheap by just about any measure. For value investors, it is like a kid in a candy shop.
Dirk van Dijk, CFA is the Director of Zacks Equity Research.
