To increase the odds of unearthing a good value stock, investors need to look for companies that are beating 20-year high-quality market corporate bonds in terms of higher earnings yield.
When triple-A, double-A and single-A rated companies issue securities representing their corporate loans, they are called high-quality market corporate bonds. The chance these companies will not be able to honor their financial obligation is extremely low. These securities usually grant their holders a compelling return.
The most recent monthly observation on the spot rate of the 20-year bond indicates a 4.61% yield.
Further, look for stocks with a beta higher than 1, which indicates it is more volatile than the overall market. It is wise to consider highly volatile stocks when the market is uptrending. The Dow Jones Industrial Average is rising again following a tumultuous December. The index grew more than 9% last month, marking the best January over the last three decades. Will the stock market keep on rising?
The U.S. Federal Reserve’s pause in the interest rates cycle is usually positive for investors in publicly traded equities. The central bank will be patient in increasing the interest rate as long as the rise in nonfarm payrolls doesn’t create inflation issues.
In January, the Bureau of Labor Statistics recorded an increase of 304,000 payrolls, beating expectations of 170,000. The annual inflation rate also fell to 1.9%, the lowest rate since August 2017. As a result, the Fed decided to keep interest rates unchanged at 2.25% to 2.50% after four hikes in 2018.
Thus, my screener yielded the following large-cap stocks, which are beating the 20-year high-quality market corporate bond. These stocks have a price-earnings ratio of 10.85 or less as of Feb. 1. The inverse of the ratio is the earnings yield. The stocks are more volatile than the market because their beta is higher than average.
Also, screening for stocks with a very low price-book ratio increases the odds of avoiding overpriced opportunities.
ArcelorMittal SA (MT, Financial) has an earnings yield of 20.41%. The Luxemburg-based steel giant was trading around $23.86 on Friday for a market capitalization of $23.43 billion. The stock has climbed 15% so far this year and outperformed the Dow Jones by 8%. The closing price on Friday was 22.4% above the 52-week low of $19.5 and 54.4% below the 52-week high of $36.84.
The stock has a price-book ratio of 0.59 versus an industry median of 0.99 and an enterprise value-to-earnings before interest, taxes, depreciation and amortization ratio of 0.47 compared to an industry median of 8.71. In this case, I also consider the EV-to-EBITDA ratio since ArcelorMittal operates in very capital-intensive industry. The beta is 2.65.
The stock has a forward dividend yield of 0.43% as of Feb. 1, which is much lower than the industry average of 2.89%.
Wall Street has issued an overweight rating with a price target of $33.71 per share, reflecting nearly 39% stock appreciation. An eventual trade agreement between the U.S. and China will push the share price higher.
The Peter Lynch chart suggests the stock is priced fairly.
Teck Resources Ltd. (TECK, Financial) has a price-earnings ratio of 5.18 versus an industry median of 14.76. The closing price of the Vancouver-based natural resources producer was $23.53 on Feb. 1 for a market capitalization of about $13.47 billion.
The stock has climbed 16.43% so far this year and has outperformed the Dow Jones by 3.5%. The trailing 12-month beta is 1.83. The closing price on Friday was 29.5% above the 52-week low of $18.17 and nearly 31% below the 52-week high of $30.8.
The stock has a price-book ratio of 0.79 versus an industry median of 1.74, a forward dividend yield of 0.62% compared to an industry median of 3.36% and an EV-to-Ebitda ratio 3.32 versus an industry median of 9.3.
Teck Resources has reported a trailing 12-month EBITDA margin of nearly 52% versus an industry median of nearly 24%. This data is relevant for shareholders because it is a key driver for the stock. A low real interest rate environment is beneficial for commodities. Since Teck Resources sells steelmaking coal, copper, zinc, lead, molybdenum, gold, silver and other metals, the stock is positioned for an increase.
Wall Street has set a buy rating with a price target of $31.99 per share.
According to the Peter Lynch chart, the stock is trading cheaply.
The third and final stock is Daimler AG (DDAIF, Financial). The German car manufacturer has a price-earnings ratio of 6.1 versus an industry median of 15.55 as of Feb. 1. The stock closed at $60.65 per share on Friday following a 16.7% gain year to date. The stock outperformed the Dow Jones by 9.3% over the same period. The 52-week range is $50.64 to $90.60 and Reuters indicates a beta of 1.46.
The stock has a market capitalization of $64.95, a price-book ratio of 0.86 versus an industry median of 15.15 and a price-sales ratio of 0.34 versus an industry median of 0.78. The price-sales ratio is a useful indicator for stocks operating in the auto manufacturing industry.
The company has paid a dividend since 1999. The forward dividend yield is 7.42% versus an industry median of 2.41%. Wall Street has an overweight rating on the stock and set a price target of $59.99 per share. The overweight rating means the stock is expected to outperform the market. The catalyst for the year will be an increase in earnings as analysts are projecting 11.7% growth.
The Peter Lynch chart suggests the stock is undervalued.
Disclosure: I have no positions in any securities mentioned.
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