Among companies trading on the New York Stock Exchange and Nasdaq, financial services companies currently trade below their fair values.
Two companies, Waddell & Reed Financial Inc. (WDR, Financial) and Robert Half International Inc. (RHI, Financial) are undervalued based on multiple valuation methods. As these companies offer good value at bargain prices, several gurus invested in financial services companies during the past six months.
Valuations come in an eclectic variety of flavors
The All-in-One Guru Screener allows you to filter the companies using over 150 filters, including about 90 filters grouped by fundamentals, valuation ratio, profitability and growth. As observed on the valuation ratio tab, we can value the companies using a wide range of valuation methods: from the simple price-earnings (P/E) ratio to the more advanced ones, including price to DCF value, price to earnings power value, price to Peter Lynch fair value, etc.
Previous articles discussed the key valuation ratios, EV ratios and DCF valuation ratios. This article will focus on the more advanced ratios.
In June 2012, GuruFocus added the valuation box to the company stock’s summary page. The following table summarizes each of the valuation methods featured.
| Valuation method | Code | Basis | Definition | Comments | |
| Earnings power value | EPV | E | See definition page for detailed explanation. | Assumes sustainable profitability. | |
| Net current asset value | NCAV | A | Cash + ¾*Accts. Rec + ½*Inventory - total liabilities | The basis of the Ben Graham Net-Net Screener | |
| Tangible book | TB | A | Total equity less preferred stock and intangibles, all over shares outstanding | ||
| Projected FCF | PFCF | A, E, G | Based on the following article. | ||
| Median P/S value | MPSV | E | Per-share revenue * P/S ratio 10y median | Assumes stock valuations revert to historical means in terms of P/S ratios. P/S is independent of profit margins. | |
| Graham number | G# | A, E | sqrt of (22.5*TB per share*EPS (nri)) | No growth. Underestimates companies with annual EPS growth >10% or low TBPS. | |
| Peter Lynch fair value | PL | E, G | 5y EBITDA growth rate * TTM EPS (nri) | Unlike the Peter Lynch Chart, P/E is based on 5y EbitdaG and not 15. | |
| DCF, FCF based | DCF | C, G | See definition page for explanations. The basis for the Undervalued Predictable Screener. | ||
| DCF, earnings based | DCFE | E, G | See definition page for explanations. We also provide the DCF Calculator. | ||
The distributions of average P/EPV, price to Peter Lynch fair value and price to Graham number across industries are slightly right skewed. The average industry P/EPV is about 2, while the average P/LynchValue and P/GrahamNumber across industries is about 2.5. Although 21 industries have P/LynchValue less than 1, just 10 industries have P/GrahamNumber less than 1.
Unlike the other advanced valuation ratios, the P/MPSV is roughly symmetric and has a narrower range. The average P/MPSV across industries is about 1.3, and 17 industries have a P/MPSV less than 1.
Low valuation ratios lead to good investing opportunities
The “Advanced Undervaluation Screener” lists the companies that are undervalued based on their fair values. Such companies meet the following criteria:
- We will only consider the companies with strong financial strength. The company’s financial strength rank is at least 6.
- The following three advanced valuation ratios are less than 1:
- Price to Median PS
- Price to Lynch Value
- Price to EPV
Nineteen companies, including Robert Half and Waddell & Reed, made this list as of Oct. 5. Robert Half has seven good signs, which imply high value potential in the short term. The risk consulting company has strong financial strength scores, expanding operating margins and valuation ratios near five-year lows. Additionally, the company’s profit margins and returns are near 10-year highs.
Robert Half’s P/MPSV and P/EPV sharply decreased from their 10-year high in 2006 to their 10-year low in 2009. However, these ratios gradually increased from 2009-2015 before reverting to the mean in 2016.
On the other hand, Waddell & Reed has more volatile P/MPSV and P/EPV ratios. Despite this, both ratios sharply declined from their 10-year high in 2014 to values below 1 by the end of 2015.
Likely due to low P/MPSV and P/EPV values, these two companies have high value potential. Mario Gabelli (Trades, Portfolio) invested nearly 600,000 shares in Waddell & Reed in early 2016, and four gurus, First Pacific Advisors (Trades, Portfolio), Ray Dalio (Trades, Portfolio), John Hussman (Trades, Portfolio) and David Dreman (Trades, Portfolio) invested in Robert Half International.
A user-friendly website
GuruFocus offers several user-friendly features to its customers, including Customized Series in Interactive Charts, Customized Filters in the All-in-One Guru Screener and Customized Screeners. Additionally, the Interactive Charts contains other cool features, including the addition of text.
Customized Series allows you to graph user-defined financial metrics onto the chart. With this feature, you are not limited to the predefined financial metrics. Similar to the Customized Filters feature in the All-in-One Screener, Customized Series allows you to input a formula for your series. To graph a customized series, simply click on Customized Series, input the desired formula for the series, and click the “Next” button to name the customized series and choose the Y-axis. Click the “Finish” button to finish building the series.
Likely the most user-friendly of all value screeners, the All-in-One Guru Screener allows you to generate user-defined screeners from over 150 predefined filters. However, the number of active filters available is actually infinite since you can add customized filters by clicking on the Customized tab, followed by the blue “Create New Filter” button. The pop-up screen allows you to input the formula for your filter, and upon clicking save, you automatically apply that filter.
As a premium member, you have access to all value screeners, the monthly Buffett-Munger Newsletter, and the Manual of Stocks for the companies trading on the Standard & Poor’s 500 index. Additionally, the All-in-One Screener contains a backtesting feature that allows you to test the portfolio’s performance over the past three years.
Premium Plus members have additional access, including the Manual of Stocks for all U.S. companies and backtesting for up to 10 years. Please review the membership benefits and sign up for a free seven-day trial.
Disclosure: The author has no position in the stocks mentioned in the article.
