If you want to increase your likelihood of generating large returns, then looking for reasonably priced stocks of companies that have good financial conditions and are expected to grow their net earnings per share is a strong start.
I, therefore, looked for stocks which are trading below or close to the Peter Lynch earnings line and have a return on invested capital that surpasses the weighted average cost of capital, indicating the generation of excess returns. Yielding more than what it costs to raise the necessary funds is typical of a company with a solid and well-structured balance sheet.
Thus, investors could be interested in the following stocks whose bottom lines should improve quite a lot over the next several years.
Emerson Electric
The first stock that meets the above-listed criteria is Emerson Electric Co. (EMR, Financial), a St. Louis-based technology and engineering provider of solutions to industrial, commercial and consumer markets worldwide.
The share price ($45.72 as of April 3) trades below the Peter Lynch earnings line, which indicates that the stock is priced reasonably.
The stock has a market cap of $27.97 billion and a 52-week price range of $37.75 to $78.38.
Emerson Electric has a ROIC of 19.06%, which surpasses the WACC of 8.29%.
Wall Street sell-side analysts estimate that Emerson Electric will increase its earnings by nearly 9% next year and by nearly 5% per annum over the next five years, which will be a significant improvement from the past five years' annual growth rate of 1.93%.
Analysts also issued an overweight recommendation rating for the stock with an average price target of $63.21 per share.
H&R Block
The second stock that meets the above-listed criteria is H&R Block Inc. (HRB, Financial), a Kansas City, Missouri-based provider of assisted income tax return, do-it-yourself tax and virtual tax preparation services to the general public in North America and Australia.
The share price ($11.94 as of April 3) stands substantially below the Peter Lynch earnings line, suggesting the stock trades fairly.
The stock has a market cap of $2.3 billion and a 52-week price range of $11.29 to $29.62.
H&R Block has a ROIC of 31.13%, which is much higher than the WACC of 4.79%.
Wall Street sell-side analysts estimate that the annual earnings per share of H&R Block will grow by 107.5% next year and 10% on average over the next five years, topping that of the S&P 500 Index, which is forecasted to grow by 15% and 6% respectively.
Analysts also issued a hold recommendation rating for the stock with an average price target of $18.83 per share.
W.R. Grace
The third stock that meets the above-listed criteria is W.R. Grace & Co. (GRA, Financial), a Columbia, Maryland-based producer and global seller of specialty chemicals.
The share price ($33.86 as of April 3) currently trades near the Peter Lynch earnings line, though slightly higher, indicating that the stock is still fairly priced.
The stock has a market cap of $2.24 billion and a 52-week range of $26.75 to $79.71.
The company has a return on invested capital of 13.62%, which is more than three times the weighted average cost of capital of 4.5%.
Wall Street sell-side analysts estimate that W.R. Grace will grow its annual earnings by 9.31% on average over the next five years, which will mark an impressive turnaround from the negative yearly average of 0.96% posted for the past five years.
Analysts also issued an overweight recommendation rating for this stock with an average target price of $57.83 per share.
Disclosure: I have no positions in any securities mentioned.
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