In order to unearth stocks of strong businesses that are reasonably priced and are capable of generating high returns, I looked for companies with the following characteristics:
1) Their share prices trade near or below the Peter Lynch earnings line.
2) Their return on invested capital (ROIC) ratio exceeds the weighted average cost of capital (WACC) ratio significantly, indicating that financial resources are being employed in an efficient and effective manner.
3) Their annual earnings per share are predicted to grow faster than that of the S&P 500 index over the next five years. The S&P 500 is used as a benchmark for the U.S. market.
Lifevantage Corp
The first company that has the above-listed criteria is Lifevantage Corp. (LFVN, Financial), a Sandy, Utah-based distributor of nutritional and personal care products.
The share price ($11.64 as of April 14) stands near the Peter Lynch earnings line, indicating that the stock is reasonably priced.
The stock has a market capitalization of $166.39 million and a 52-week price range of $7.75 to $17.25.
Lifevantage Corp has ROIC of 93.45%, which is higher than the WACC of 9.44%.
Wall Street sell-side analysts predict that Lifevantage Corp will increase its EPS by nearly 12% every year over the next five years, which tops the S&P 500's growth rate of 5%.
Analysts recommend buying shares of Lifevantage Corp and have established an average price target of $20 per share.
Philip Morris International Inc
The second company that has the above-listed criteria is the New York-based tobacco giant Philip Morris International Inc (PM, Financial).
The share price ($77.18 as of April 14) trades close to the Peter Lynch earnings line, which indicates that the stock is fairly priced.
The stock has a market capitalization of $117.31 billion and a 52-week price range of $56.01 to $92.74.
Philip Morris International Inc has ROIC of 50.97%, which is higher than the WACC of 5.34%.
Wall Street sell-side analysts forecast that the EPS of Philip Morris will grow by 6.21% every year over the next five years.
Analysts recommend an overweight rating for Philip Morris and have stablished an average price target of $86.53 per share.
Westlake Chemical Partners LP
The third company that has the above-listed criteria is Westlake Chemical Partners LP (WLKP, Financial), a Houston, Texas-based producer and seller of ethylene and related products in the U.S.
The share price ($15.96 as of April 14) currently trades significantly below the Peter Lynch earnings line, which indicates that the stock is reasonably priced.
The stock has a market capitalization of $561.71 million and a 52-week range of $10.31 to $26.48.
Westlake Chemical Partners LP has a return on invested capital of 25.23%, which is almost five times the weighted average cost of capital of 5.05%.
Wall Street sell-side analysts predict that Westlake Chemical Partners will grow its EPS by 11.23% every year over the next five years.
Analysts recommend an overweight rating for shares of Westlake Chemical Partners LP and have established an average target price of $24.31 per share.
Disclosure: I have no positions in any securities mentioned.
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