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IQ Trends: 10 Blue Chips for Growth & Income

06/01/2020 5:00 am EST

Focus: STRATEGIES

Kelley Wright

Managing Editor, Investment Quality Trends

The Timely Ten is not a trading vehicle, it is simply our current ten best undervalued ideas to help you fill a hole or holes in your portfolio, explains dividend expert Kelley Wright, editor of Investment Quality Trends — and a participating speaker at MoneyShow's Virtual Event on June 10-12.

Traditionally, we have suggested investors consider S&P Dividends and Earnings Quality Ranking of A- or better; a long-term annual dividend growth of 10% over the last twelve years; 3) a P/E of 15 or less; a payout ratio of 50% or less; and a debt level of 50% or less.

Historically, investors that have relied solely on these criterions in their stock selection process 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.

For the investor with a long-term investment time-horizon this is not an issue, as they are getting paid to wait from consistent dividend payments and dividend increases.

To augment the traditional criterions above, we also look to identify Undervalued stocks that also have excellent internal economic measures. For example, 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 like an ROIC of at least 10%.

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Most investors are familiar with the P/E ratio. With the way that earnings are calculated and reported, however, P/E’s are a questionable measure of value. Our belief is that free cash flow yield (FCFY) gives much greater insight to a company’s value than does the P/E ratio. We look for 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. In our experience the Street tends to extrapolate the present into the future, forever, which is just plain silly.

Understanding this tendency gives us the opportunity find value where the Street does not, however. To keep this short and simple, a PVR of 1.0 indicates the Street is valuing the future growth to remain on par with the company’s historical average.

Each tenth (.1) is a ten percent change in that assessment. For example, a PVR of 0.9 indicates the Street is valuing the future growth prospects of the company at a 10% discount from the company’s historical average — forever.

A PVR of 1.1 indicates the Street is valuing the future growth prospects of the company at a 10% increase from the historical average — forever. We look for a PVR between 0 and 1.6, with the lower the number the better.

Here are the current stocks that make up The Timely Time:

AbbVie, Inc. (ABBV) — yielding 5.64%
Philip Morris International (PM) — yielding 6.12%
Omnicom Group (OMC) — yielding 4.24%
Worthington Industries (WOR) — yielding 3.35%
ABM Industries (ABM) — yielding 2.49%
Hawkins Inc. (HWKN) — yielding 2.70%
VSE Corp. (VSEC) — yielding 1.75%
Reliance Steel & Aluminum (RS) — yielding 3.01%
Cass Information Systems (CASS) — yielding 3.25%
The Toro Company (TTC) — yielding 1.67%

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