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James Li
James Li
Articles (1323)  | Author's Website |

5 Undervalued Predictable Companies for Summer 2020

Undervalued stocks with consistently growing earnings to consider as coronavirus fears reignite

As investors grapple with the potential for additional coronavirus outbreaks, five predictable companies that are trading below intrinsic value based on the discounted free cash flow model are Discovery Inc. (NASDAQ:DISCA)(NASDAQ:DISCB)(NASDAQ:DISCK), LKQ Corp. (NASDAQ:LKQ), Sleep Number Corp. (NASDAQ:SNBR), Tractor Supply Co. (NASDAQ:TSCO) and Amgen Inc. (NASDAQ:AMGN) according to the Undervalued-Predictable Screen, a Premium feature of GuruFocus.

Dow ends week with a bang but lower for the week

On Friday, the Dow Jones Industrial Average closed at 25,605.54, up 477.37 points from Thursday’s close of 25,128.17 but down 1,505.44 points from last Friday’s close of 27,110.98.

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Friday’s market moves come on the heels of Thursday’s major selloff: The Dow tanked over 1,800 points on Thursday as investors feared the potential for further Covid-19 cases during the summer. Centers for Disease Control and Prevention Deputy Director Jay Butler said that if virus cases, which topped 2 million cases in the U.S. this week according to Johns Hopkins University statistics, rise dramatically, the mitigation efforts applied back in March “may be needed again.” Butler closed with a warning that the virus outbreak “is not over” and is still making headlines around the globe.

Undervalued-predictable stocks could help mitigate volatility

As the markets fluctuate on coronavirus-related news, investors can offset the risk by investing in stocks that have consistently grown revenue and earnings over the past 10 years. A recent backtest study shows that stocks with a GuruFocus business predictability rank of four stars or higher returned over 11% per year during the January 2009 to December 2019 backtest period, compared to an average return of just around 9% per year for stocks with predictability rank of 2 or 2.5.

GuruFocus’ undervalued-predictable screen lists the stocks with predictability rank 4 stars or greater and are trading below their intrinsic value based on the discounted cash flow and discounted earnings models.

Discovery

According to the undervalued-predictable screen, shares of Discovery are trading approximately 80% from their discounted cash flow value.

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The Silver Spring, Maryland-based company operates a wide range of networks, including Discovery, TLC, Animal Planet, HGTV and Food Network. GuruFocus ranks the company’s profitability and valuation 9 out of 10 on several positive investing signs, which include a high Piotroski F-score of 8, an operating margin that outperforms 95.50% of global competitors and a price-earnings ratio that is near a 10-year low and outperforms over 79% of global diversified media companies.

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Gurus with large holdings in Discovery include Mario Gabelli (Trades, Portfolio) and the Smead Value Fund (Trades, Portfolio).

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LKQ

Shares of LKQ are trading approximately 67% below the discounted cash flow valuation of $76.

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GuruFocus ranks the Chicago-based auto parts manufacturer’s profitability 9 out of 10 on the back of a strong Piotroski F-score of 7 and a 4.5-star business predictability rank. Additionally, LKQ’s three-year revenue growth rate of 13.20% outperforms 80.59% of global competitors.

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Jeff Ubben (Trades, Portfolio)’s ValueAct has a large holding in LKQ, with over 21 million shares as of the first-quarter filing.

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Sleep Number

Shares of Sleep Number are trading approximately 62% below the discounted cash flow value of $95.

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The Minneapolis-based company offers sleep solutions and provides a wide range of bedding furniture. GuruFocus ranks the company’s profitability 9 out of 10 on several positive investing signs, which include a high Piotroski F-score of 7, a 4.5-star predictability rank and a return on assets that outperforms 85.50% of global competitors.

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Tractor Supply

Shares of Tractor Supply are trading approximately 29% below discounted cash flow value.

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The Brentwood, Tennessee-based company operates retail farm and ranch stores in the U.S. GuruFocus ranks the company’s profitability 9 out of 10 on several positive investing signs, which include a high Piotroski F-score of 7, consistent revenue growth and a return on assets that outperforms 90.48% of global competitors.

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Amgen

Shares of Amgen are trading approximately 20% below the discounted cash flow value.

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The Thousand Oaks, California-based company produces drugs and therapies for renal disease and cancer. GuruFocus ranks the company’s profitability 9 out of 10 on several positive investing signs, which include expanding operating margins, a 4.5-star business predictability rank and a return on assets that outperforms nearly 90% of global competitors.

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See also

GuruFocus redesigned the DCF Calculator page in June. The following image shows a sample screen shot for Apple Inc. (NASDAQ:AAPL).

You might notice several blue pencil-mark icons in the User Defined DCF section. The pencil-mark icon allows you to enter a customized value for key DCF parameters like the discount rate, the tangible book value, years of growth in the growth stage and terminal stage and the growth rates for both stages.

The Expected Growth Rate section tells you if the expected growth rate is likely achievable based on the historical growth rate. If the expected growth rate is lower, than the growth rate might be achievable. If the expected growth rate is higher, than the growth rate might not be achieved.

Disclosure: The author is long Amgen.

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About the author:

James Li
I am an editorial researcher at GuruFocus. I have a Master's in Finance from SMU, and I enjoy writing reports on financial trends and investor portfolios. Follow me on Twitter at @JamesLiGuru!

Visit James Li's Website


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