Although this market seems to be jogging in place, especially after the indifferent summer, the fact is the market has gone up strongly over the past year, and that makes it harder to find value, notes J. Royden Ward of Cabot Benjamin Graham Value Letter.
Benjamin Graham has been recognized for decades as the father of value investing. Warren Buffett was a student of Graham at Columbia University, and later worked for Graham for several years.
For our latest special report, I combine Warren Buffett’s and Ben Graham’s criteria for choosing stocks. Here, we look at four high-quality companies that fit our criteria. To find these Graham-Buffett style investment opportunities, I looked for stocks with:
- Free cash flow more than $20 million
- Net profit margin more than 15%
- Return on equity more than 15%
- Discounted cash flow value higher than current price
- Market capitalization more than $1 billion
- Standard & Poor’s rating of B+ or better
- Positive earnings growth during the past five years with no deficits
- Dividends currently paid
These stocks sell at sensible prices, offer reasonable appreciation potential, and provide solid dividends. I am confident these high-quality stocks will fare very well during the next six months.
Aflac (AFL)
This is the world’s largest supplemental cancer insurance provider, deriving 75% of its business from Japan. It provides insurance to one out of every four Japanese households.
Aflac has expanded its product line and added new marketing venues in recent years. Non-cancer insurance policies now account for 70% of new sales.
Sales increased 13% and earnings per share rose 9% during the 12 months ended June 30. I forecast sales and earnings per share growth of 9% during the next 12 months.
Growth could receive an additional boost if US sales improve noticeably. AFL shares sell at 7.5 times latest EPS, which is well below the ten-year average P/E of 10.6. The 2.7% dividend yield adds significant value.
American Express (AXP)
Established in 1850, AmEx is a leading global payments and travel services company.
Sales and earnings declined in 2008 and 2009, but rebounded to record levels in 2011. The company’s strong balance sheet and low customer defaults helped it weather the recent recession.
I forecast sales growth of 7% and EPS growth of 12% during the next 12 months, similar to the preceding 12 months ended June 30. The company’s new technologies in digital and mobile payments will help produce solid growth during the next several years.
AXP shares are undervalued at 13.4 times latest EPS. The shares are low risk and offer a dividend yield of 1.4%. Warren Buffett’s Berkshire Hathaway owns 13% of AXP.
National Oilwell Varco (NOV)
More than 90% of the mobile offshore drilling rigs manufactured in the past 20 years use drilling components manufactured by National Oilwell Varco.
Oil and natural gas companies are focusing on oil drilling and placing less emphasis on natural gas drilling because of the low prices and profits of natural gas. The switchover is creating new demand for National’s products and services.
In August, the company agreed to purchase Robbins & Myers for $2.5 billion. Robbins makes pumps and valves for the oil-drilling industry, and the company’s rapid sales and earnings growth will enhance National’s results in future years.
National’s sales and earnings jumped 32% during the past 12 months ended June 30. Sales and EPS will likely increase 15% during the next 12-month period.
NOV sells at a reasonable 15.4 times my forecast EPS of 6.25. The stock pays a dividend yielding 0.6% and is low risk.
Nu Skin Enterprises (NUS)
This company develops and distributes personal care products and nutritional supplements. Based in Provo, Utah, Nu Skin derives a whopping 86% of sales from outside North and South America. Europe contributes less than 10% of sales.
Weak sales in Japan and Europe are being offset by quite strong sales throughout Nu Skin’s other markets. New products are selling well, and additional products will be introduced during the next several months.
Nu Skin’s sales increased 23% and EPS soared 56% during the past 12 months ended June 30. I expect sales to increase 12% and EPS to rise 14% during the next 12 months.
At 13.8 times latest EPS, NUS shares are attractive. The dividend yield of 1.9% and low risk rating create an excellent investment opportunity.
Subscribe to Cabot Benjamin Graham Value Letter here...
Related Reading:
Growing Dividends for 58 Years
