In my opinion, picking U.S.-listed equities that have the following characteristics represents a solid starting point when looking for potential value opportunities:
- The shares are trading near or below their historical median valuations.
- The return on invested capital (ROIC) exceeds the weighted average cost of capital (WACC), which suggests the company is creating value for shareholders.
- The stock holds optimistic recommendation ratings on Wall Street.
Thus, investors could be interested in the following stocks, as they meet the above criteria.
Vale SA
The first company that meets the criteria is Vale SA (VALE, Financial), a Brazilian producer and global seller of iron ore and iron ore pellets to steel companies.
The share price ($22.08 as of May 7) is below the Peter Lynch earnings line ($29.76) and the median historical valuation line ($24.91), as the chart below illustrates.
The stock has a market capitalization of $113.29 billion and a 52-week price range of $7.86 to $22.195.
Vale SA has a ROIC of 26.52%, which is more than three times the WACC of 8.44%.
As of May, the stock has a median recommendation rating of overweight with an average target price of $24.22 per share on Wall Street.
Humana Inc
The second stock that has the criteria is Humana Inc (HUM, Financial), a Louisville, Kentucky-based healthcare plans company.
The share price ($465.08 as of May 7) is above the Peter Lynch earnings line ($421.80) but slightly above the median historical valuation line ($451.16), as the chart below shows.
The stock has a market capitalization of $60 billion and a 52-week range of $365.06 to $474.70.
Humana Inc has a ROIC of 20.57%, which is more than three times the WACC of 6.37%.
On Wall Street, as of May, the stock has a median recommendation rating of overweight and an average target price of $490.98 per share.
Regeneron Pharmaceuticals Inc
The third stock that qualifies is Regeneron Pharmaceuticals Inc (REGN, Financial), a New York-based biopharmaceutical company that engages in the discovery, development and production of drugs for the treatment of several medical conditions.
The share price of $496.75 (as of May 7) is trading above the Peter Lynch earnings line ($460.05), but still significantly below the median historical valuation line ($1,204.91), as the following chart exhibits.
The stock has a market capitalization of $52.92 billion and a 52-week price range of $441 to $664.64.
Regeneron Pharmaceuticals Inc has a ROIC of 31.25%, which is more than 15 times the WACC of 2.05%.
On Wall Street, as of May, the stock has a median recommendation rating of overweight and an average target price of $626.95 per share.
Disclosure: I have no positions in any securities mentioned.
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