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.
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.
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’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.
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.
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.
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.