After selling off strongly in the three weeks of the year, the major U.S. indices found themselves down more than 7 percent for the year. The sell-off was much stronger in individual names, with some stocks down 20 percent or more. Despite being hard on the nerves, this market volatility has pushed some great stocks down to very attractive levels.
The screen. We used the Recognia Strategy Builder to search for large-capitalization U.S.-listed stocks that have attractive valuation levels after the recent market sell-off. We began by setting a minimum threshold on market capitalization of $7.5 billion. This ensured we were focused on the largest and most stable companies in the U.S. market.
To select companies that are currently valued well, we screened for stocks with a PEG ratio of 5 or less. PEG ratio is the price-to-earnings ratio divided by the earnings growth rate. A lower PEG ratio means that that the valuation compared to the growth rate is more attractive.
To select stocks with healthy business and strong earnings, we selected only companies with an earnings yield greater than 5 percent. Earnings yield divides the company’s earnings by the price per share — a higher earnings yield is better and indicates a superior earnings rate per dollar of equity invested.
Finally, we filtered on dividend yield and selected stocks with yields of 1.5 percent or greater. This ensures we get paid while we wait for our investments to appreciate in the long term.
General Electric Co. (ticker: GE). The largest company making our list is General Electric, with a market cap exceeding $280 billion. With business lines spanning transportation, energy, life sciences and appliances, GE is a diversified industrial conglomerate, which is a relatively safe bet for the long term. GE boasts a PEG ratio of 0.55, an earnings yield of 5.5 percent and a 3.3 percent annual dividend yield. Last week, GE reported results for the fourth quarter and full year that beat analysts’ expectations for earnings, but disappointed slightly on revenue. Revenue was negatively impacted by declines in GE’s oil and gas sector business.
Ford Motor Co. (F). Ford also makes our list, squeaking in with a PEG ratio of exactly 5. Ford also has an earnings yield of 5.2 percent and an attractive 4.9 percent dividend yield. Ford’s sales performance is excellent, with overseas markets leading the way. In 2015, Ford’s year-over-year sales growth in China was 27 percent and growth in Europe was 11 percent. On January 12, the company announced a special dividend of 25 cents per share.
Suncor Energy (SU). Suncor is a Canadian integrated oil company based in Calgary, Alberta. Although the decline in crude oil prices has hit the production part of Suncor’s business, the retail and distribution portion is still strong. This month, Suncor finalized the acquisition of Canadian Oil Sands, giving it significant new production assets in western Canada. With oil prices showing signs of having achieved a cyclical low, Suncor is poised to benefit from the subsequent recovery in energy. Suncor current has a PEG ratio of 2.54 and a 4 percent annual dividend yield.
L-3 Communications Holdings (LLL). New Jersey based L-3 Communications is an American defense, avionics and navigation systems provider. Defense companies are often considered defensive plays during down markets. L-3 is looking like a well-valued stock with an earnings yield of 6 percent and a PEG ratio of 3.1. In late October, the company released quarterly results that surpassed analysts’ expectations for earnings by a wide margin, but missed narrowly on revenue. LLL stock has traded down by nearly 14 percent since then, now giving the stock a very attractive valuation level.
Historical performance. Recognia Strategy Builder provides a backtesting capability to evaluate how well an investment strategy would have worked over a five-year period. Using a buy-and-hold strategy with quarterly re-balancing, the screen described above had a 13.7 percent annualized return compared to 6.4 percent for the Dow Jones industrial average and 8.4 percent for the Standard & Poor’s 500 index.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
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4 Stocks That Are Great Bargains After Wall Street’s Sell-Off originally appeared on usnews.com