Validea is a fascinating newsletter that assesses stocks based on the known criteria of "legendary" stock investors, such as Warren Buffett and Peter Lynch.
Here, editor John Reese reviews Telefonica (NYSE: TEF) -- a Spain-based telecom firm with operates in Europe and Latin America -- based on the strategy of quantitative analyst James O'Shaughnessy.
"James O'Shaughnessy has noted that 'disciplined implementation of active strategies is the key to performance.' He should know; his study of 44 years of stock market data is one of the most extensive ever of the market.
"The system he devised based on that research produced average back-tested returns of 22% per year for those 44 years. At times like these, it's more important than ever to heed his advice, and keep your emotions in check by focusing on fundamentals.
"Telefonica (NYSE: TEF), based in Madrid, Telefonica is involved in the communications, information, and entertainment arenas in Europe, Africa, and Latin America. The firm has a presence in more than 20 countries and more than 218 million customers.
"About 160 million are mobile phone users, about 42 million are landline phone users, and another 9.6 million use broadband communication solutions. In addition, another 1.4 million use the company's pay-per-view accesses. Almost two-thirds of the company's income comes from outside of Spain.
"Telefonica gets approval from the value strategy that I base on the writings of James O'Shaughnessy, in part because of its size.
"When looking for value stocks, O'Shaughnessy targeted large firms, because they tend to exhibit solid and stable earnings. My O'Shaughnessy-based value model thus requires that a firm have a market cap greater than $1 billion, and Telefonica, with a cap of $134.4 billion, easily passes the test.
"O'Shaughnessy also compared value plays to the market average in a number of areas, one of which was cash flow per share. The model I base on his writings calls for companies to have cash flows per share greater than the market mean, which is currently $1.63. Telefonica's cash flow per share is $18.06, easily passing another of this strategy's tests.
"Another way O'Shaughnessy targeted large, well-known companies was by looking at the number of outstanding shares that a stock had. My O'Shaughnessy-based model requires companies to have more outstanding shares than the market average, and with 1.58 billion shares outstanding, Telefonica is well above the market average of 623 million.
"O'Shaughnessy also sought out firms with high sales, and my model requires a company's sales to be at least 1.5 times the market mean. With sales of $85.8 billion over the past 12 months, Telefonica has done more than four times the market mean of $18.6 billion.
"Finally, O'Shaughnessy takes all of the companies that meet the four aforementioned criteria and ranks them according to dividend yield, with the top 50 passing his dividend test. Telefonica's dividend yield, 3.57%, is in the top 50, so it passes this final test."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
Closing Bell: When We All Love the PIIGS (NBG, SQNM, PG, ERTS, KO)
Serious Money: Cheapest Stocks List Shrinks from 26 to 21
Chasing Value: Hasbro Earnings Makes My Point
