2 Good-Value Growth Stocks

03/27/2012 9:30 am EST

Focus: STOCKS

Randall Eley

President and CIO, The Edgar Lomax Company

Randall Eley, president of The Edgar Lomax Company, is a value investor. Today, he shares two stocks with solid value but that he thinks also have growth potential.

Randall, what do you think, value versus growth? I know you’re a value guy, but is there a place for growth in your portfolio this year?

The beauty is there’s a place for growth, but on a value basis.

Explain that.

I’m not the most objective party on the subject of whether an investor should invest looking for value or looking for growth. But the important thing is to understand what you’re doing when you’re looking to buy stocks on a value basis.

We like to pay low price-to-earnings ratios, also known as P/E ratios, where we take the earnings a company has made over the last year. And we want to pay the lowest price we can for that basket of earnings, assuming that company will earn at least that amount in the future. That way, we’ll get a higher earnings yield.

Well, the fact of life is today, when you look at the S&P 500 and you screen out of the companies with solid balance sheets that you pay relatively low price-to-earnings ratio, they actually have pretty good histories of growing their earnings too.

You’re not generally projecting enormous levels of growth, like 20% a year, but expectations of 5% to 7% growth a year are not unusual and we can buy it. We can buy companies with PE ratios of 11, 12, or even lower.

That’s cheap.

Yeah, which is projecting in earnings of about 10% a year over the next ten years.

Right. Yeah, that’s pretty good. Now, you’re dealing mostly in the large-cap arena.

That’s right.

Are there any particular sectors that you especially like right now?

We are bottom-up investors, meaning we look at the stocks themselves. Now, it just so happens that has placed us with a large weighting in energy. That is normal.

I’ll give you two names that we really like. One is ConocoPhillips (COP), with a current P/E ratio of 8. This is taking their earnings of the last year. Even if the earnings don’t go up, you are talking about projecting a return if they just don’t go down of about 12% a year.

That’s healthy.

Yes. So earnings can decline a little bit and you still get a good return. You also are getting a dividend yield of almost 4%—3.7% a year—which is almost twice the rate of a ten-year government note.

Exactly…beats fixed income.

It sure does. It sure does. But you also have Chevron (CVX) in the same industry. Also a P/E ratio of 8 and a dividend yield of 3.1%, so even they are 50% more than the S&P 500. And the fact is, everyone we know has to use their product. Whether it is for necessities or pleasure.

There’s always so much talk about—we’ve got all the hybrid engines, the electric cars, and all of those things, and we’re not going to have to be dependent on foreign oil. We’re not going to live long enough to see that.

I agree. In addition, as the solution to our probably overdependence on oil develops, these companies are going to be part of that solution.

Exactly, because they’re buying a lot of these smaller companies with the new technology.

That’s right. They have the money and they are focused on producing energy. I think they have a lot more expertise than most of the rest of us to figure this out.

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