With the pace of new COVID-19 cases slowing, many investors expect economic growth to accelerate over the course of 2021. John Buckingham, publisher of the Prudent Speculator newsletter, has provided a custom display of 25 compliant stocks. following criteria:
“The prudent speculator finds them undervalued enough to justify a buy today.”
Expected earnings per share growth of at least 15% over the next 12 months.
Forward price-to-earnings ratios below 20. (In comparison, the forward P / E for the S&P 500 SPX Index,
it’s a weighted 22.1, according to FactSet, up from 17.6 a year ago and 16.6 two years ago).
For non-financial companies, an estimated increase in sales of at least 10% over the next 12 months.
The Prudent Speculator is published by the Kovitz Investment Group of Chicago. Kovitz manages about $ 6 billion through value strategies primarily for private clients. Buckingham co-manages the Al Frank Fund VALUX,
which is rated four stars (out of five) by investment research firm Morningstar and follows the strategies outlined in the Prudent Speculator.
Starting with a group of approximately 2,800 companies, the Prudent Speculator team applies proprietary screens to identify stocks that are “potentially undervalued” relative to the broader market. The list narrows by looking at companies’ levels of cash, debt, debt maturity schedules, debt service costs, capital expenditures, and profit margins.
Then Buckingham and his team consider qualitative factors, such as brand positioning, to narrow their list down to a group of roughly 120 actions that they recommend in five strategies covered in the newsletter.
Prudent Speculator’s core strategy has the highest total return of the last 30 years among the newsletters tracked by Hulbert Financial Digest.
The case for value after the recession
In an interview, Buckingham cited data from the 14 previous economic recoveries after recessions showing that value stocks tend to outperform the broader market:
In the chart above, the value and growth groups are defined according to the criteria developed by Eugene Fama and Kenneth French. NBER stands for the National Bureau of Economic Research, a research institute that defines when recessions occur.
Some growth actions in the value field
While Buckingham is a value investor, there are growth stocks listed, including Cohu Inc. COHU,
and Kulicke & Soffa Industries Inc. KLIC,
both make equipment used by semiconductor manufacturers.
Here are the 25 actions that meet all the criteria. The companies are listed in alphabetical order:
Kovitz Investment Group, FactSet
Scroll down the chart to see all the data, including Prudent Speculator price targets.
The emphasis here is on increases in earnings per share. For value stocks, in this case, stocks that trade at significantly lower future P / E ratios than the S&P 500 index, earnings increases can be expected to support higher stock prices, and such Sometimes even higher P / E ratios, in the long run.
The graph includes expected increases in sales, but only for non-financial companies. A big driver of bank profit growth is expected to be the release of loan loss reserves, as credit losses turn out to be lower than those that companies prepared during the first and second quarters of 2020. Higher demand Lending would also help, since it would be a continuous increase in the spreads between long-term interest rates and short-term rates, as has happened in recent weeks.
Returning to Cohu and Kulicke & Soffa Industries, two growing stocks that were on the list, Buckingham said that the shares of most companies involved in semiconductor manufacturing had risen due to high demand.
“Their earnings have exploded and they are likely to continue to do so. Stock prices have not caught up with where the earnings are going, ”he said.
While dividend yields were not part of Buckingham’s selection criteria, you can see them by scrolling the table to the right. Listed stocks with dividend yields greater than 3.5% include Comerica Inc. CMA,
Leggett & Platt Inc. LEG,
Newmont Corp. NEM,
and Pfizer Inc. PFE,
Do not miss: These select industrial companies are expected to increase sales in 2021 from pre-pandemic levels.