The Ockham screening utility has been live for just over a week, so we are just getting our heads wrapped around the best ways to use it to filter through our coverage over 8400 stocks. Clearly, this is an exciting development for the usability of our service, and thus far the results of our screens have been a popular topic with readers of this blog. Since readers seem to like it and I like doing it, we are going to begin featuring a screener filter that we find particularly interesting daily. The stocks that we specify in these articles (as with most others articles as well) will be made openly available on our site to allow readers to see each equity’s report.
For today, we are filtering for notable stocks that were upgraded within the last week to either an Undervalued or Greatly Undervalued rating as of this week’s report. At Ockham, we are a valuation methodology aimed to improve returns for long term investors so these undervalued categories are our version of a buy rating. Obviously, Greatly Undervalued is a more positive stance than simply Undervalued.
Because we do have coverage on stocks trading outside the US we refined the search to only those US Stocks and ADRs that trade in US dollars. Furthermore, in order to keep the results “notable” we excluded any company under $1 billion in market capitalization.
The screen matched 26 stocks in our universe and we believe there are some solid ideas contained herein. Here are some of the most interesting results of this basic query.
JP Morgan Chase (JPM) – With its market cap of more than $173B, JP Morgan was the largest company to be upgraded this week. We have been weary of many financials for the better part of the last year, which has proven in hindsight to be overly cautious. However, JP Morgan has been ably led by Jamie Dimon and many believe they have emerged from the credit crisis stronger than ever before. They appear to have successfully absorbed both Bear Stearns and WaMu, although both came with their own challenges.
Now the bank, which is a diverse mix of retail, commercial and investment banking operations, is poised to grow earnings by 44% this year according to consensus analyst’s estimates. Furthermore, analysts expect 48% earnings growth in fiscal 2011 although we are not putting too much stock in long range analyst forecasts. JPM currently trades below the low end of the historically established price-to-cash earning and price-to-sales valuation ranges, and in spite of its solid management the stock has not performed on par with some of its closest competitors. Year to date, JPM is up less than 5% compared to nearly 20% for BAC, 26% for WFC, and 33% for Citi.
We are not gung-ho for JPM’s valuation as it just crossed into our Undervalued territory and we would like to see them raise the dividend as confirmation that the worst is behind us. The low dividend yield remains the biggest negative in our valuation of JPM.
Stryker Corp. (SYK) – Stryker is a company we have had our eye on for some time, as the medical device maker has looked attractive based on fundamentals for some time. Growth certainly slowed during the recession, but on an annual basis revenue never declined. Now after the temporary hold up, growth appears to back on track as sales are expected to grow by 9% this year and 7.5% in fiscal 2011. Earnings growth should exceed revenue growth, and Wall Street expects low double digit growth in earnings going forward.
Stryker has slowly and steadily climbed since hit a multiyear low in March 2009, but according to our methodology the market is still not awarding SYK with a valuation that fits with its historical view of the company. For example, price-to-cash is currently only 21.1x, but historically the market has paid at least 22.2x cash per share and as high as 34x. Currently, price-to-sales of 3.14x is equal to the low end of its historically normal valuation range of 3.14 to 4.87x. This may not be the sexiest stock out there but the valuation is appealing, particularly when looking at the demographic trends in the developed world. The number of people needing a hip-replacement or similar surgery is growing and they are living longer.
We saw two notable stocks that were recently upgraded to Greatly Undervalued. We have recently written full posts about each of them, so we will keep our comments brief. FirstEnergy (FE) is an electric utility company in the mid-west region of the US, but their stock has tanked ever since they announced their intention to merge with Alleghany Energy (FirstEnergy and Alleghany Merger: Regulator Hurdles Keep Stocks Depressed). We think that with the merger or without, this stock represents very good value for a defensive investor looking for minimal risk and reasonably high yield (nearly 6%).
The other stock is Washington Post Company (WPO) which we have discussed often as an attractively priced stock. They have the for profit education cash cow Kaplan, and their media enterprises are seeing a nice recovery as well. For more, read Look at the Numbers: The Washington Post Really Is Dirt Cheap.
