Our list of The Timely Ten stocks represents our top ten recommendations from the Undervalued category of blue chips as of each issue of our newsletter, explains Kelley Wright, editor of Investment Quality Trends.
Historically, investors that have acquired stocks simply because they are in the Undervalued category have been handsomely rewarded over time. The only critique is that some stocks remain in the Undervalued area for a significant amount of time before they begin to demonstrate price appreciation.
There are multifaceted explanations/reasons for why a stock may remain in the Undervalued area for an extended period. In our experience, although a company may offer excellent current value in terms of its dividend yield, its internal economic measures may not be sufficiently attractive for current buying interest, thus the high dividend yield and the extended period in the Undervalued category.
To identify those Undervalued stocks that also have excellent internal economic measures, we produce the following metrics to The Timely Ten:
Return on invested capital (ROIC) measures how much profit a company generates for every dollar invested in the company. Our belief is it is the truest measure of a company’s cash on cash returns.
As such, we are interested in companies that produce a lot of cash from their investments in the company because this is where profits, and therefore dividends, come from. We prefer an ROIC of at least 10%.
Free cash flow (FCF) is the amount of cash that remains after everything has been paid, all new investments have been made, and is available for distributing to all the equity shareholders. In the old days, we used to call this “profits.”
Free cash flow yield (FCFY) is a ratio that compares the free cash flow to the value of the business. FCFY, which is the FCF divided by the adjusted enterprise value of the company, gives much greater insight to a company’s value than does the P/E ratio. We prefer an FCFY of at least 5%.
Price to Value Ratio (PVR) is a measure of how the market is valuing the future growth prospects of a company. The Street uses GAAP, which is flawed for stocks, and tends to extrapolate those flaws from the present into the future, forever, which is just plain silly.
The PVR is based on economic values, which identifies value where the Street does not. In short, a PVR of 1.0 indicates the market value and economic value are equal.
Each tenth (0.1) is a ten percent deviation. For example, a PVR of 0.9 indicates the economic value is at a 10% discount from market value. A PVR of 1.1 indicates the economic value is at a 10% premium to the market value. We prefer a range for the PVR between 0 and 1.6, with the lower the number the better.
Based on these criteria, here is our current list of the Timely Ten stocks:
Omnicom Group (OMC) — yielding 3.77%
3M Company (MMM) — yielding
Cardinal Health (CAH) — yielding
Walgreens Boots Alliance (WBA) — yielding
J.M. Smucker (SJM) — yielding
AbbVie Inc. (ABBV) — yielding
International Business Machines (IBM) — yielding
Kellogg Co. (K) — yielding
Old National Bancorp (ONB) — yielding
BancorpSouth Bank (BXS) — yielding
