With Christmas Day a week away, investors are finding last-minute deals on high-quality stocks that have attractive valuations. According to the All-in-one Screener, a GuruFocus Premium feature, five stocks with high quality and valuation ranks are Biogen Inc. (BIIB, Financial), Booking Holdings Inc. (BKNG, Financial), NIC Inc. (EGOV, Financial), Ituran Location and Control Ltd. (ITRN, Financial) and NetEase Inc. (NTES, Financial).
As Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B, Financial) CEO Warren Buffett (Trades, Portfolio) once said, it is better to invest in good companies at fair prices instead of fair companies at good prices. Berkshire lists four key investing criteria: understandable business, favorable long-term prospects, competent management and attractive price. The first three criteria highlight a company’s quality, while the final criterion highlights a company’s valuation.
Invest only in good companies
GuruFocus has warned users to invest only in “good companies,” companies that have high business quality. We define a high-quality company as one that has high financial strength and strong profitability, which includes high profit margins and consistent revenue and earnings growth.
Apple Inc. (AAPL, Financial), the top holding of Berkshire, qualifies as a high-quality company on several positive investing signs, which include a 4.5-star business predictability rank, operating margins that are outperforming over 97% of global competitors and a 10-year median return on equity over 39%. Apple’s business predictability rank of 4.5 stars suggests strong and consistent revenue and earnings growth over the past 10 years, a major criterion of Buffett’s investing approach.
High quality is not enough
Unfortunately for investors, Apple’s valuations are near 10-year highs, suggesting overvaluation. GuruFocus added a new valuation rank that measures the valuation of a company relative to other companies in its industry and the company’s historical valuations. Apple’s valuation rank of 2 suggests that the Cupertino, California-based tech giant is one of the most overvalued companies within the industry. Additionally, Apple is trading close to its 10-year maximum price-sales value: Apple’s price-sales ratio of 5.01 is near a 10-year high and underperforms 87.11% of global competitors.
Screener seeks high-quality stocks with high valuation ranks
GuruFocus has added a “valuation rank” filter on the Screener, allowing users to screen for high-quality stocks with high valuation ranks. Figure 1 illustrates the location of the “Valuation Rank” filter under the “Fundamental” tab.
Figure 1
Users can also search for the filter using the Screener’s “Search Filter” field as Figure 2 illustrates.
Figure 2
As of Wednesday, the Screener identified five companies from the high-quality list with a valuation rank of at least 7.
Biogen
Biogen markets drugs like Avonex and Rituxan, which help with multiple sclerosis. GuruFocus ranks Biogen’s profitability 10 out of 10 on several positive investing signs, which include a five-star business predictability rank and operating margins that have increased approximately 4.3% per year on average over the past five years and are outperforming over 96% of global competitors.
The Cambridge, Massachusetts-based company’s valuation ranks 9 out of 10: Biogen’s price-earnings ratio and price-earnings-to-growth ratio are close to 10-year lows and are outperforming over 80% of global competitors. Additionally, Biogen’s price-sales ratio of 4.02 is below its 10-year median of 5.13 despite underperforming 66.56% of global drug manufacturers.
Gurus with large holdings in Biogen include PRIMECAP Management (Trades, Portfolio), the Vanguard Health Care Fund (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies.
Booking
Booking offers reservation services through a wide range of platforms, including Priceline.com for hotels and flights and OpenTable.com for restaurants. GuruFocus ranks the Norwalk, Connecticut-based company’s profitability 10 out of 10 on several positive investing signs, which include a 3.5-star business predictability rank and operating margins that have increased approximately 0.40% per year on average over the past five years and outperform over 95% of global competitors.
GuruFocus ranks Booking’s financial strength 6 out of 10: Debt ratios are underperforming 80% of global competitors, though the company has a strong Altman Z-score of 6.47. And Booking’s valuation ranks 7 out of 10 on the heels of price-earnings and price-sales ratios close to five-year lows despite underperforming over 70% of global competitors.
Gurus with large holdings in Booking include Yacktman Asset Management (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).
NIC
NIC provides digital services and solutions to governments. GuruFocus ranks the company’s profitability 9 out of 10 on several positive signs, which include operating margins that have increased approximately 0.7% per year on average over the past five years and are outperforming over 87% of global competitors. Despite this, NIC’s financial strength ranks just 7 out of 10 as a weak Piotroski F-score of 3 offsets debt ratios that are outperforming over 76% of global competitors.
Ituran
Ituran operates two business segments: location-based services and wireless communication products. GuruFocus ranks the Israeli company’s profitability 9 out of 10 on several positive investing signs, which include a 4.5-star business predictability rank and operating margins that are outperforming 94.17% of global competitors. Despite this, Ituran’s financial strength ranks just 6 out of 10 as debt ratios that underperform over 65% of global competitors offset a strong Altman Z-score of 3.06.
Ituran’s positive investing signs also include price-earnings and price-sales ratios close to five-year lows, contributing to a valuation rank of 9 out of 10.
NetEase
NetEase provides a wide range of online services, which include mobile games, media, email and e-commerce. GuruFocus ranks the Beijing-based company’s financial strength 8 out of 10 on the heels of a strong Altman Z-score of 5.96. Additionally, even though operating margins have contracted over the past five years, NetEase’s profitability ranks 10 out of 10 on the heels of a five-star business predictability rank and a return on equity that outperforms 92.03% of global competitors.
NetEase’s valuation ranks 9 out of 10: The company’s price-sales ratio of 4 is still near the 10-year low of 2.63 despite underperforming 56.87% of global competitors. Likewise, NetEase’s price-earnings ratio of 13.79 outperforms 75.79% of global interactive media companies.
Disclosure: Author is long Biogen.
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