In order to increase the likelihood of unearthing potential value opportunities in the U.S. market, investors may want to consider stocks with the following characteristics:
- The share prices are trading below their historical median valuations.
- The return on invested capital exceeds the weighted average cost of capital significantly, which indicates that financial resources are employed in an efficient and profitable way.
- They hold optimistic recommendation ratings on Wall Street, suggesting that analysts expect the stock price to improve in the future.
The three stocks below meet the above criteria.
Cisco Systems Inc
The first stock that qualifies is Cisco Systems Inc (CSCO, Financial), a San Jose, California-based communication equipment distributor.
The share price of $39.85 (as of Oct. 9) is trading in line with the Peter Lynch earnings line and below the median historical valuation line, as the chart below illustrates.
The stock has a market capitalization of $168.70 billion and a 52-week price range of $32.40 to $50.28.
Cisco Systems Inc has a return on invested capital of 15.4%, which is three times the weighted average cost of capital of 5.1%.
Wall Street sell-side analysts foresee that Cisco Systems Inc 's EPS will decline by 3.4% this year but will grow by 7.4% in 2021 and by 6.2% every year over the next five years. As of October, the stock has eight strong buy recommendations, 11 buy recommendations and eight hold recommendation ratings. The average target price is $48.17 per share.
Align Technology Inc
The second company that makes the cut is Align Technology Inc (ALGN, Financial), a San Jose, California-based designer and marketer of medical devices for the dental industry.
The share price ($328.64 as of Oct. 9) is slightly above the Peter Lynch earnings line but significantly below the median historical valuation line.
The stock has a market capitalization of $25.89 billion and a 52-week price range of $127.88 to $340.29.
Align Technology Inc has a ROIC of 80.3%, which is about six times the WACC of 12.1%.
Wall Street sell-side analysts forecast that after a 56.6% decrease this year, Align Technology Inc' EPS will soar 182.5% next year and increase by 12.9% every year over the next five years.
As of October, the stock has seven strong buy recommendation ratings and four buy recommendation ratings. The average target price stands at $324.50 per share.
Molina Healthcare Inc
The third stock that holds the criteria is Molina Healthcare Inc (MOH, Financial), a Long Beach, California-based healthcare plans company.
The share price ($199.2 as of Oct. 9) trades approximately in line with the Peter Lynch earnings line and significantly below the median historical valuation line.
The stock has a market capitalization of $11.81 billion and a 52-week range of $102.85 to $206.10.
Molina Healthcare Inc has a ROIC of 77.9%, which is more than 15 times the WACC of 5.1%.
Wall Street sell-side analysts predict that Molina Healthcare Inc's EPS will grow by 2.7% this year, 14.7% next year and by nearly 10% every year over the next five years. As of October, the stock has two strong buy recommendation ratings, two buy recommendation ratings, eight hold recommendation ratings and one underperform recommendation rating. The average price target is $211.17 per share.
Disclosure: I have no positions in any securities mentioned.
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