If you are looking for potential value opportunities amid U.S.-listed equities, picking stocks that meet the following three criteria represent a solid starting point, in my opinion:
- The share prices are trading near or below their historical median valuations, which suggests that the stock is not excessively overvalued
- The return on invested capital surpasses the weighted average cost of capital, which suggests the company is creating value for its shareholders
- The stock has received optimistic recommendation ratings from sell-side analysts on Wall Street
Thus, investors may be interested in the following three stocks, as they meet the above criteria.
Monster Beverage Corp
The first stock that meets the criteria is Monster Beverage Corp (MNST, Financial), a Corona, California-based developer and distributor of energy drinks and concentrates worldwide.
The share price of $84.15 (as of Nov. 27) is trading above the Peter Lynch earnings line but still near the median historical valuation line, as the chart below shows:
The stock has a market capitalization of $44.42 billion and a 52-week price range of $50.06 to $88.41.
Monster Beverage has a return on invested capital of 34.24%, which is more than four times the weighted average cost of capital of 7.86%.
Wall Street sell-side analysts forecast that Monster Beverage will be able to increase its EPS by 12.7% this year, 13.5% in 2021 and 14.2% every year over the next five years. As of November, the stock has four strong buy recommendations, 10 buy recommendations and four hold recommendation ratings for an average target price of $92.20 per share.
D.R. Horton Inc
The second company that meets the criteria is D.R. Horton Inc (DHI, Financial), an Arlington, Texas-based residential construction company.
The share price ($75.98 as of Nov. 27) is below the median historical valuation line and the Peter Lynch earnings line, as the below chart illustrates:
The stock has a market capitalization of $27.69 billion and a 52-week price range of $25.51 to $81.21.
D.R. Horton has a ROIC of 16.17%, which is more than 1.5 times the WACC of 10%.
Wall Street sell-side analysts forecast that D.R. Horton's EPS will increase by 22.2% this year, by 12.1% next year and by 15.8% per annum over the next five years. As of November, the stock has six strong buy recommendation ratings, eight buy recommendation ratings and nine hold recommendation ratings for an average target price of $88.05 per share.
Genmab A/S
The third stock that meets the criteria is Genmab A/S (GMAB, Financial), a Danish biotech developer of antibody-based treatments for cancer patients.
The share price ($37.13 as of Nov. 27) trades significantly below the median historical valuation line, though still above the Peter Lynch earnings line, as below chart exhibits:
The stock has a market capitalization of $24.32 billion and a 52-week range of $16.24 to $39.81.
Genmab A/S has a ROIC of 202.26%, which is almost 80 times the WACC of 2.56%.
Wall Street sell-side analysts estimate Genmab's earnings will increase by 122% this year, hitting $11.31 per share. On Wall Street, the stock has a median recommendation rating of buy with an average target price of $39.86 per share.
Disclosure: I have no positions in any securities mentioned.
Read more here:
- 2 Falling Knives to Catch
- This Trio Is Growing Earnings Fast
- 3 High-Quality Picks for the Value Investor
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