While most investors are fretting the markets recent contraction, you can be quite confident that "my pal Warren" has a smile on his face, as does Peter Lynch, Ken Heebner, Bill Miller, Bruce Berkowitz, and any number of fellow value investors that know now may be a time of opportunity. That is because they have the experience and understanding to pounce when they have a chance to buy things cheap. This is the fourth installment of my series to discover just that: cheap stocks. If you would like to get on board from the beginning then review the initial post which screened for stocks with lower than market average P/E ratios, see Serious Money: Market Looks Cheap to Me -- 35 Stocks. In the second installment, I looked at yield and PEG ratios: Serious Money: Still Cheap Market -- 35 Stocks + Yields & Growth. Then I moved on to the the P/S and P/CF metrics in Serious Money: Cheapest Stocks Yet -- From 35 to 26, cutting nine stocks.
Now we continue the adventure by highlighting return-on-equity (ROE) and company debt, with the results listed from best to worst.
Return-On-Equity (Net Income/Shareholder's Equity.) Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder's equity does not include preferred shares.
- Autozone (AZO) 551.2
- Lockheed Martin (LMT) 57.9
- Campbell Soup (CPB) 53.34
- Kimberly-Clark (KMB) 37.35
- Sysco (SYY) 32.92
- Chevron Corp (CVX) 29.45
- Darden Restaurants (DRI) 27.65
- Hasbro (HAS) 21.24
- duPont deNemours (DD) 22.01
- Wal-Mart (WMT) 20.34
- EZ Corp (EZPW) 19.55
- Archer-Daniels-Midland (ADM) 19.5
- Hewlett-Packard (HPQ) 19.49
- AFLAC (AFL) 16.03
- Raytheon (RTN) 15.34
- United Health (UNH) 15.04
- Verizon (VZ) 14.0
- American Electric Power (AEP) 13.17
- Chubb Corp (CB) 13.01
- Noble Corp (NE) 11.7
- Travelers Companies Inc. (TRV) 11.45
- CVS Corp (CVS) 9.71
- Xcel Energy (XEL) 9.58
- JPMorgan Chase (JPM) 5.9
- Goldman Sachs Group (GS) 4.44
- ConocoPhillips (COP) -24.68
Any double digit increase in shareholder value is usually considered a positive achievement by the company management team. If that were the lone criteria, then 21 of the 26 stocks would have cleared the hurdle. However, we are going to set the bar a little higher and look for a minimum 15% using "my pal Warren's" criteria. In that case, we find 16 of the 26 would make the cut. ConocoPhillips was the only company to lose equity while Autozone's miraculous ROE is an anomaly. Autozone's five-year average is 286%, still sky high. For some perpsective it's ROIC is a terrific 29% and a better comparable.
Long Term Debt to Equity Ratio: A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.
- EZ Corp (EZPW) 7.34
- Noble Corp (NE) 11.06
- Chevron Corp (CVX) 11.63
- AFLAC Inc (AFL) 19.22
- Travelers Companies Inc. (TRV) 23.25
- Raytheon (RTN) 24.05
- Chubb Corp (CB) 25.62
- CVS Corp (CVS) 33.53
- Hewlett-Packard (HPQ) 38.16
- United Health (UNH) 47.33
- ConocoPhillips (COP) 49.52
- Archer-Daniels-Midland (ADM) 55.44
- Sysco (SYY) 66.70
- Wal-Mart (WMT) 69.61
- Hasbro (HAS) 78.48
- JPMorgan Chase (JPM) 97.72
- Darden Restaurants (DRI) 104.65
- Kimberly-Clark (KMB) 113.31
- Xcel Energy (XEL) 119.92
- Lockheed Martin (LMT) 121.18
- American Electric Power (AEP) 134.76
- Verizon (VZ) 145.46
- duPont (E.I.) deNemours (DD) 158.3
- Campbell Soup (CPB) 360.44
- Goldman Sachs Group (GS) 669.47
- Autozone (AZO) -556.05
Here we go from EZ Corp with very little debt to Goldman Sachs with loads and to the anomaly of Autozone. What stands out is that the semi-regulated utilities and financial stocks carry the largest burden. The first group because the businesses are capital intensive by nature, and the second because of the financial meltdown. These include five stocks ranked from fair to bad and they are GS, XEL, JPM, AEP and VZ. Having gotten this far through our screening process I do not think they are necessarily expensive stocks, but we are searching for cheap.
The remaining 21 stocks will be screened for book value and tangible book valuable.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: Among the positions discussed in this post I own shares of ADM, EZPW, RTN and SYY.
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