Three "Value" Plays

08/25/2006 12:00 am EST


Charles Carlson

Editor, DRIP Investor

With the market’s continued volatility, undervalued stocks are looking very attractive to long-term investors, with an eye to a steadier market down the road. Here, Charles Carlson recommends three ‘old guards’ whose shares are trading at bargain-basement levels…


“While the idea of buying cheap stocks with share-price momentum may sound oxymoronic, history suggests that strategies combining valuation and stock-performance metrics are highly effective. One of the biggest risks of buying value stocks is buying too early—and being stuck with a bargain-priced stock for many years. A major risk of buying based on share-price momentum is buying too late—after a stock has already outrun its fair value.


“To reduce these risks, look for value stocks displaying relative share price strength. All three of the following stocks rank among the top one-fifth of US stocks based on Quadrix® Performance, which measures total returns in different periods over the past 12 months. Also, all three rank among the top one-fourth of stocks based on Quadrix Value—and among the top one-tenth based on Quadrix Overall.


“Bank of America (BAC NYSE) has rallied 7% over the last month and 13% year-to-date, reflecting solid first-half results. The company exceeded consensus profit estimateshandily in the March and June quarters, with strong performances in corporate and investment banking. Like many banks, Bank of America has suffered a decline in its net interest margin—the difference between the amount earned on loans and the amount paid on deposits—in part because of rising short-term interest rates. While margin pressures may continue in the near term, Bank of America seems capable of generating 8% to 10% growth in per-share earnings through 2007. The stock, yielding 4.3%, is a Buy and a Long-Term Buy.


“At 16 times estimated year-ahead earnings of $5.24 per share, Lockheed Martin (LMT NYSE) trades below its five-year average forward P/E of 17. While the company has been reaping the benefits of strong defense spending, investors worry about how long that strength will continue. However, the stock has gained momentum recently on an improving near-term profit outlook. After delivering per share-profit growth of 31% in the June quarter, the company increased its per-share earnings and sales forecasts for 2006, citing growth across its business units. Lockheed Martin is a Buy and a Long-Term Buy.


Morgan Stanley (MS NYSE) surged to five-year highs following outstanding May-quarter results. In June 2005, former company president John Mack returned after a four-year absence to replace embattled chief executive Philip Purcell. Mack’s turnaround efforts are paying off, and performance has improved across all business lines—helped by an increase in stock trading and merger-and-acquisition activity. Morgan Stanley—trading at 11 times estimated year-ahead earnings, a discount to its peer-group average—is a Buy and a Long-Term Buy.”

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