In order to have a higher chance of finding potential value opportunities in the U.S. market, I have screened for stocks with the following characteristics:
- The share prices are trading close to the Peter Lynch earnings line.
- The return on invested capital surpasses the weighted average cost of capital significantly, which suggests the company is using its financial resources in an efficient and profitable way.
- The stock performance is expected to improve in the future as they have optimistic recommendation ratings on Wall Street.
Merck
The first stock that makes the cut is Merck & Co. Inc. (MRK, Financial), the Kenilworth, New Jersey-based drug giant.
The share price of $83.48 as of Aug. 14 is trading above the Peter Lynch earnings line, but still below the median historical valuation line.
The stock has a market capitalization of $211.14 billion and a 52-week price range of $65.25 to $92.64.
Merck has a return on invested capital of 16.73%, which is almost 7 times the weighted average cost of capital of 2.43%.
Wall Street sell-side analysts forecast that Merck will see its earnings per share grow 6.25% every year over the next five years. Also, the stock has an overweight recommendation rating with an average target price of $94.80 per share on Wall Street.
Vipshop Holdings
The second company that meets the criteria is Vipshop Holdings Ltd. (VIPS, Financial), a Chinese internet retailer for various brands.
The share price ($22.59 as of Aug. 14), though above the Peter Lynch earnings line, still trades in line with the median historical valuation line, as the chart illustrates.
The stock has a market capitalization of $15.19 billion and a 52-week price range of $6.17 to $24.02.
Vipshop has a ROIC of 15.18%, which is more than 2.5 times the WACC of 5.56%.
Wall Street sell-side analysts forecast that Vipshop's annual earnings will grow by 26% to $1.31 this year, by 22% to $1.6 in 2021 and by 2.44% every year over the next five years. The stock has a strong buy recommendation rating with an average target price of $21.67 per share on Wall Street.
Electronic Arts
The third stock that qualifies is Electronic Arts Inc. (EA, Financial), the Redwood City, California-based electronic gaming and multimedia company.
The share price ($140.43 as of Aug. 14) trades above the Peter Lynch earnings line, but significantly below the median historical valuation line.
The stock has a market capitalization of $40.56 billion and a 52-week range of $85.69 to $147.36.
Electronic Arts has a ROIC of 31.65%, which is about five times the WACC of 6.28%.
Wall Street sell-side analysts estimate that Electronic Arts will grow its annual earnings per share by 15.6% to $5.56 at the end of the current fiscal year, by 6.7% to $5.93 in the following fiscal year and by 14.13% every year over the next five years.
The stock has an overweight recommendation rating with an average target price of $151.70 per share on Wall Street.
Disclosure: I have no positions in any securities mentioned.
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