A difficult economic environment such as the one we are currently experiencing provides the best time to find good investments at a discount, because paying the right price has a significant influence on long-term investment returns. The current market negativity has resulted in many high-quality companies’ market values being unfairly punished by indiscriminate selling, creating material discounts to intrinsic value.
Although short-term returns during periods of pessimism are often disappointing, time and patience are the most important attributes of successful value investors. We can increase our chances of success by being greedy when others are fearful.
Thus, in this article, we will take a look at five companies I have identified while screening for value opportunities. These companies have been consistently profitable, but they trade with price-earnings ratios below 10.
Why 10 in particular? I chose a price-earnings ratio of 10 as my base becauase if you reverse the price-earnings ratio and multiply it by 100, you get the earnings yield. So a price-earnings ratio of 10 implies an earnings yield of 1/10*100 = 10%, while a price-earnings ratio of 7 has an earnings yield of 1/7*100 = 14.28%.
In my opinion, when you can get a 10% or higher earnings yield, growth is nice to have but not mandatory, depending on the stock. Long-term market returns for the S&P 500 are about 10% per annum (which includes growth) while the long-term average price-earnings ratio for the index is about 14 for an earnings yield of ~6.7%.
So with this benchmark, I set about screening for companies with consistent profitability which met my criteria of at least a 10% earnings yield and a price-earnings ratio of 10 or less.
Obviously, these companies are a bit "out of favour" at the moment. I also put in a requirement of at least a 4% dividend to mitigate the risk of investing in stocks of companies that might not be growing. So, in summary, these are cheap, profitable companies which pay an attractive dividend. Here are five of my top picks from among these screening results.
| Ticker | Company | CurrentPrice | ProfitabilityRank | ProfitabilityRank 2021 | ProfitabilityRank 2020 | ProfitabilityRank 2019 | ProfitabilityRank 2018 | ProfitabilityRank 2017 | PE Ratio(TTM) | Market Cap($M) | 5-Year EPS withoutNRI Growth Rate | DividendYield % |
| - | - | Above 7 | - | - | - | - | - | 1 - 9 | - | Above 4% | ||
| BMO | Bank of Montreal | $97.84 | 6 | 7 | 5 | 5 | 5 | 9 | 7.83 | 65,691.79 | 7.40 | 4.08 |
| INTC | Intel Corp | $31.46 | 9 | 9 | 10 | 10 | 9 | 9 | 6.84 | 129,174.76 | 21.90 | 4.59 |
| MFC | Manulife Financial Corp | $17.78 | 7 | 7 | 6 | 6 | 6 | 6 | 6.17 | 33,593.17 | 25.90 | 5.77 |
| NVS | Novartis AG | $82.60 | 8 | 7 | 8 | 8 | 8 | 7 | 8.62 | 178,807.40 | 17.30 | 4.03 |
| VZ | Verizon Communications Inc | $42.24 | 7 | 7 | 8 | 7 | 7 | 7 | 8.57 | 177,395.95 | 3.30 | 6.06 |
Bank of Montreal
Bank of Montreal (BMO, Financial) is Canada's oldest bank and part of the Canadian Banking oligopoly (the "Big Six"). Its a true blue chip with a substantial presence in the U.S. as well as Canada that has survived and thrived through many a recession and a few depressions through its 200-year history. If sells for a price-earnigns ratio of 8 and pays a dividend of over 4%.
According to the GF Value chart, the stock is fairly valued. Since this is a financial company, I like to look at book value growth. Long-term book value growth has been over 8% per annum. The return on tangible equity, an important metric for banks, is over 20%.
Intel Corp
Lately, Intel Corp. (INTC, Financial) has been getting a lot of grief from investors, but I think this is unjustified. Intel invented the semiconductor industry as we know it and its not going anywhere. Sure, it may have lost some of its mojo to younger competitors like ARM and AMD (AMD, Financial), but I think it will bounce back when it gets its foundry business started up again. With price-earnings ratio of 7, there's not a lot of risk. The dividend yield is over 4.5%. Semiconductors are everywhere in the economy now and there is enough room for many big players. Intel, unlike many of its competitors, is also vertically integrated with both design and manfacturing expertise.
According to the GF Value chart, Intel is significantly undervalued.
The company is spending a lot of money building new plants in Ohio and Arizona, funded in part by the U.S. government, which wants to reduce dependence on Taiwan and South Korea. Historically, Intel has grown earnings per share at a 9% clip. Going forward, growth will be less according to analysts' estimates, but I don't think that implies a decline.
Manulife
Manulife (MFC, Financial) is a Canada-based life insurance company which also has vast operations in the U.S. (where it operates under the John Hancock brand name) and in Asia. It used to be a high flier before the Financial Crisis, but the company sold too many stock market index-linked variable annuities, and when the market crashed, the company was forced to dilute shareholders and raise money to shore up the reserves. The company has spent the last decade rebuilding trust with investors but its still very cheap.
The GF Value chart shows the stock as significantly overvalued. However, I think this is just due to short-term issues which can be corrected in time.
The current inflationary environment is good for insurers like Manulife. Not only does inflation erode the amount of benefits the company has to pay out, but it can earn more from its float (accumulated difference between benefits and premiums) because of rising interest rates. Long-term book value has been rising at over 5%. The return on tangible equity is over 20%.
Novartis
The third-largest swiss company by market cap, Novartis (NVS, Financial) is a big pharma powerhouse that does business all over the world. It is a consistent performer with a price-earnings ratio of 9 (though investors should be warned that the forward price-earnings ratio is 12) in spite of having grown its earnings at over 17% over the last five years and over 7% long-term. It also pays a dividend of over 4%. It is selling off all non-core businesses and focusing strictly on patented prescription pharmaceuticals and biotech.
The GF Value chart rates the stock as modestly undervalued.
Verizon
U.S. telecommunications giant Verizon (VZ, Financial) is the senior member of the trio of companies which rules the mobile phone market in the U.S. It currently has a 31% market share. While it has a high debt load, this is not of much worry as this is a very capital-intensive business and the company has enormous cash flow. It is paying a lush dividend of over 6% and is good value at a price-earnings ratio of 9 with a decent earnings growth rate of 3.3%.
The GF value chart shows it as modestly undervalued.
The long-term Ebitda trend line shows around 7.5% annualized growth. I predict that going forward, we can expect it to grow slightly faster than the U.S. GDP at around 3%. Data and mobility continues to grow and pricing power in an oligopoly is strong.
