Is there any value out there?

As the stockmarket continues to soar, it’s becoming increasingly more difficult to find reasonable value. My interest has been attracted to a couple of stocks recently, but I’m increasingly of the view that the lack of value that’s around is delivering a message that’s becoming harder to ignore. 

 

Everybody loves getting a good deal. Whether it’s a nice winter jacket, a new car, (or even a new house!) we all want to know that we’ve been able to manage a fair price, if not an absolute bargain. The reality is though that I’m not finding much of anything that I really consider to be compelling value at this time. There are a few positions that still look to be reasonably attractive, but finding value is proving to be pretty elusive.

I posed the question at the beginning of 2013 as to whether we were in a “new bubble”. At that time, the DOW was hovering somewhere around 14,000. I ended up concluding that we weren’t at that time, based on pretty reasonable valuations of the DOW based on overall historical PE ratios.  Fast forward just over a year and we are up at around 16,300, and likely still heading higher. That’s a nice move up of more than 16%, thanks largely to the strong gains of 2013.

Whether we are in a bubble or not, it’s getting increasingly harder to find value. Certainly it’s getting increasingly harder to find value in positions that I don’t already own!

Having said that, here’s where I’ve been seeing some opportunities.

Large Cap Dividends

If you were to pick areas where value still does exit, I’d say that selective large cap dividend players still offer it. The problem is that many of them have been offering the same “value” for the better part of a year or more. My positions in many of these large cap dividend players are already pretty strong, and I’m not really sure that I’d like to increase any of these beyond that levels I currently own.

That said, here’s what I believe still offers some measure of value.

Coca Cola (KO)

Well, it’s been tough for Coca Cola to catch a break for the better part of almost 2 years. Coca has been fairly range bound over this period and hovering around the $40 mark. The reasons for this seem to be fairly obvious. US market growth has been pretty weak, with consumer preferences trending away from carbonated beverages to healthier options.

Coca Cola has been investing in these healthier options, but it will take additional time to reposition the business towards some of these trends in waters, juices etc.  That said, international growth in carbonated beverages is still very much alive. Coca Cola should continue to ride favorable volume trends throughout Asia, Latin America etc.

Worth picking up? If you believe that the carbonated beverages consumption trend has maxed out, then Coca Cola may just be a value trap. On the other hand, if you feel that the company’s long record in following the pulse of what consumers are drinking hasn’t abated, then this could be a good time to pick up shares. I’ve got a large long position in Coca Cola. I’m not looking to add anything more at these levels.

McDonalds (MCD)

Another classic large cap dividend payer that’s also been fairly range bound since early 2012. McDonalds has been caught up in worries of market saturation and flat north american, european same store sales for the past couple of years. Every decade or so, McDonalds seems to have investors wondering whether the company can pull out another trick to keep the growth going.

To the company’s credit, it’s been able to find a few additional arrows in it’s growth arsenal that it has been able to deploy. In the late 90′s, McDonalds joined the breakfast rush. The McCafe line also followed shortly after. In the early part of this century, McDonalds made a mark with healthier eating options, and additionally managed to generate significant operating efficiencies that helped power operating margins almost 10% higher in the last decade and delivered a real earnings tailwind.

Worth picking up?  If the belief is there that McDonalds isn’t out of options to tweak menus and introduce new offerings to see further spikes in its earnings profile than this could be a very good time to benefit from a nice 3.3% yield. Again, I have a rather large existing position in McDonalds, accumulated at current price levels, so I won’t be looking to add more shares at these levels.

BP (BP)

While BP has had a nice rebound in it’s stock price over 2013, the company is still well under industry averages on most measures including Price/Earnings, Price/Sales and Price/Book. With questions around the ultimate size of the settlement for the Gulf of Mexico incident still outstanding, and additional fines and penalties for gross negligence still possible, there looks to be a large legal overhang on BP stock that is depressing the current stock price.

Worth picking up? BP still looks to have a fairly attractive valuation discount built into the current stock price. If the company is able to escape the worst of the penalties that are possible for a gross negligence finding, and successfully litigate other pending claims well into the future, there’s likely compelling value on offer at current prices. This is particularly the case given BP has recently been allowed to rebid for rights in the Gulf of Mexico.

Target (TGT)

Target’s credit card breach is pretty well known by all and sundry by now. While Targets stock price had since rebounded some 10% post the lows that the stock hit a couple of months ago, the stock never really got to levels that I considered a compelling buy.  I’m not convinced that Target is all that great a business. Revenue growth over the last few years has only average 2-3% annually, with return on equity at a pretty meagre 12%.

While Target may have been on partial sale, it’s a business I’m happy avoiding at present. Target strikes me as an inferior business compared to Walmart, which offers a return on equity of close to 23%, and a revenue growth rate of almost 5% annually over the last 3 years. Incidentally, Morningstar rates Walmart 4 stars and Target 3 stars presently.

Foreign Growth

There have been some special situations that have emerged recently as a result of concerns around China’s growth trajectory flattening out, and Russia looking to “annexe” parts of the Ukraine.

Bidu (BIDU)

The “Google” of China. While Bidu had a solid run in 2013, the stock has been hit by perceptions of slowing Chinese growth and how that may impact the advertising market. It’s been pretty apparent to all and sundry that China’s property market has been in a bubble. Taking steps to deflate this bubble could see China’s growth come crashing down. Bidu may not seem to be cheap at 20x earnings, however Bidu has been growing revenue over 3 yrs and 5 yrs at rates in excess of 50% annually.

Worth picking up?  I’m aiming to build a small position in Bidu for my growth portfolio during 2014. I’ve already built up this position to 50% of where I’d like to get it to. I’ll be selectively adding to this position through 2014 as opportunity and money permit.

Yandex (YNDX)

As Bidu is China’s Google, Yandex is Russia’s Google. Yandex stock has been hit by concerns of potential action against Russia following Russia’s bold moves to annex portions of the Ukraine. The company has fallen more than 33% from 2014 highs on concerns of slowing growth in Russia as well as on concerns about military action against Russia.

Like Bidu, however, Yandex has been aggressively growing revenue in recent years, with revenue growth in excess of 40% year on year. The company does look very attractively valued to me at present and Morningstar suggest a PEG ratio of just 0.6, which suggests significant undervaluation given expected company growth.

Worth picking up? I’ve been slowly and selectively adding  Yandex to my growth portfolio with recent falls in stock price. Again, it’s a position that I already own a reasonable stake in, so slow and steady accumulation on subsequent falls is what I am aiming for, should they eventuate.

 

Comments

  1. So far the only undervalued stocks I’ve purchased this year were KO, MCD, Unilever (UL). I just wrote a post on this topic also, so clearly I’m not the only one questioning stock valuations. Hope you guys are loving the house!
    -Bryan

    • Integrator says:

      I also feel KO and MCD will appear to have been undervalued in hindsight, several years from now once their growth trajectories resume. The big question that seems to remain for most investors is whether the growth for these businesses is behind them, or whether they will be able to find another wave.

      • Ulrich says:

        I m confused about the relative low valuation of these too very conservative Blue Chips in times of rallying stock prices. Look at KO , it was priced in these valuations even in most times in 2009 and 2010 with much more fears.

        In the long term i think u do better with these too. Many stocks with much worser business models are priced the same or even bigger – so KO and McD will outperform a lot of the in the long time.

        A problem is maybe that US Investors often talk about Wendy and their growth and think McD is dead because of that. But i live in a small German average down and Mc Dondals is the only fast food chain around.This pictures is the same in many regions of the world and so i would give McD a Premium for that.

        • Integrator says:

          Ulrich,

          I think you’ll always have these periods where investors happen to chase growth stocks and where solid and stable “income” performers like MCD or KO get left behind, and stock valuations for these income stocks don’t keep up. With the US Stock market indexes hitting all time highs, we are arguably going through one of these periods. There is also a fear element that MCD and KO are ex growth. As I’ve tried to suggest, these stocks continue to keep posting solid income and growth gains. Their stock prices will eventually catch up to continued improvements in business performance. Patience is key.

  2. I totally agree. I am definitely approaching this year much more cautiously than I have past years. I am long the market currently, but that could change quick. I do see some upside to the market this year, but I realize it is almost priced to perfection also.

    • Integrator says:

      I’ll still remain long the market, but I likely won’t look to deploy too much capital at current prices, unless there are some selective bargains that emerge here and there.

  3. Marvin says:

    I think there are still small corners of the market where there is still some value, particularly gold stocks but those are more speculative and not the typical investment I look to make.

    • Integrator says:

      Marvin, you could be right on gold stocks holding some latent value. As you suggest though, the underlying commodity is so volatile that I couldn’t reasonably trying to seek out returns amongst these stocks (at least not in the core portfolio).

  4. Jon says:

    Hi FI, I purchased and max’d out my positions on Unilever, Diageo and SAB Miller recently. Long term never-sell investments.

  5. I feel like BP has been a tempting value stock for a few years now. I’ve held on to the shares I bought after the oil spill, but haven’t bought more recently because I’m not comfortable with it taking up more of my portfolio than it already does.

    • Integrator says:

      FM, I tend to agree. I have a sizeable position currently. I’m also not looking to add anymore to this than what I already own. The fat dividend on offer is pretty tempting

  6. One vote for BIDU here. I think its an excellent long term investment. I took a small position on KO last week for similar long term reasons.

    • Integrator says:

      BIDU doesn’t seem to great it’s due credit like Google. It’s always mired in concerns about what the Chinese government may do, or issues around Variable Interest Entities on which it trades on the US exchanges. I’m comfortable taking a small position here

  7. Mr. SFZ says:

    Nice post, FI. I have the same opinion of the large cap stocks you mentioned and have been dollar cost averaging into KO, MCD, and TGT over the last few months. I added BP in the low 40′s last fall. Some other undervalued dividend growth names right now in my opinion are Phillip Morris and Aflac.
    Best wishes,
    SFZ

    • Integrator says:

      Mr SFZ,

      They are some solid predictable names that you’ve added which should serve you well long term. Boring can be beautiful….and make you very wealthy too!

  8. I agree with the general sentiment of the market…great value is definitely not easy to find right now! The stocks that are close to my buy price are: Family Dollar (FDO), Western Union (WU), Ensco plc (ESV), Transocean Ltd (RIG), and Medallion Financial Corp (TAXI). If your looking for companies to further evaluate, these are some you may want to consider.

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