I recently read a notification about Oppenheimer & Co. providing its 10 picks among thousands of stocks that were identified as value stocks. I wanted to put a little more context, quantitatively, on these picks and see whether they meet my stringent investment checklist.
Valuations
I would define anything of value while using the traditional price-to-earnings and price-to-book valuations whenever a company’s shares sell less than the ongoing Standard & Poor's 500 index valuation.
In this case, only 40% or four out of 10 in the listed selection met this assumption. In ascending order, WESCO International (WCC, Financial) and Anthem (ANTM, Financial) ranked the least expensive among the group.
HCA Holdings (HCA, Financial) appeared to be less expensive in terms of earnings multiple, but the company has had negative book value over the past half decade. Further digging revealed that HCA Holdings has more liabilities than assets; as of its recent quarter filing, the company has $40 billion in total liabilities while having $32.7 billion in total assets.
Further, First Data Corp. (FDC, Financial) has been losing millions, even billions, in the past eight years, resulting in no price-to-earnings valuation. First Data had negative profit of $458 million in 2014.
Dividend yield
Only six companies among the 10 selected by Oppenheimer provided dividends to their current shareholders. I consider a stock of any value as long as it provides yield more than the average dividend yield of the S&P 500. As a result, only Coach Inc. (COH, Financial) met this assumption.
Dividend payout ratio
Another thing to consider with dividend-paying companies is their payout ratios. A conservative investor like myself would like to see that the company is not paying all or more than its profits being provided to its shareholders. Less than 80% of profits paid out as dividends may be a good number.
To determine this ratio, I used the total dividends paid over profits earned as can be found in each of the companies' recent filings. In this case, all of the six, except Coach, have paid at a group average of 28%.
Interestingly, both FedEx (FDX, Financial) and CVS Health Corp. (CVS, Financial) have been paying its shareholders for more than 30 years.
Growth numbers
Sales growth
I tabulated each company’s growth per three-, five- and seven-year performance. I began with sales growth. Seeing a company grow its sales steadily on an annual basis provides some comfort to a prospecting investor. In this case, all companies that were highlighted green exceeded the group average of sales growth. T-Mobile (TMUS, Financial) demonstrated marvelous growth in the recent seven years. Further, only T-Mobile, Expedia (EXPE, Financial) and CVS Health displayed consistent above peer average sales growth.
Profit growth
Comparing each company’s profit growth numbers revealed further interesting results. First Data, as mentioned earlier, has been bleeding badly and has not developed positive earnings in the past seven years. Makes me wonder why the company was included in Oppenheimer’s list in the first place. Nevertheless, T-Mobile exhibited great profit growth numbers. In the group, I would personally eliminate FedEx, Coach and Anthem among the list as potential investment options secondary to negative profit growth.
Dividend growth
Among the six dividend providers, Fidelity National Information Services (FIS, Financial) demonstrated outstanding dividend growth numbers for the past seven years. I would say the next best performer is CVS Health with above 20% growth on annual average. Last, I would select FedEx.
Debt to equity
Seeking each company’s debt-to-equity data revealed that both T-Mobile and First Data are in considerable debt compared to other companies on the list. HCA Holdings did not have any ratio representation secondary to its ongoing negative shareholder equity.
In summary
A prospecting investor should always perform a brief screening of any recommended company regardless whether the list comes from a distinguished asset manager or financial adviser. An investor should also have a certain checklist to follow before considering investing.
As I have shown above, I would not recommend investing in these companies except CVS Health, FedEx and Coach. Further, I have less conviction in these three selections among the provided 10 secondary to their ongoing attributes, such as valuation, poor profit growth and dividend history.
Happy investing!
Mark
