To find value opportunities, investors should look for securities with earnings yields that at least double the returns of 20-year high-quality market corporate bonds.
These bonds represent corporate loans issued by triple-A, double-A and single-A-rated companies, which means they are unlikely to have financial trouble. The most recent observation of the Federal Reserve Bank of St. Louis indicates the average spot rate of the 20-year bond is 4.17% on a monthly basis.
In addition, since the earnings yield is the inverse of the price-earnings ratio, the following stocks have a ratio of less than 11.99 as of Friday.
What’s more, the Peter Lynch line indicates these stocks are not expensive relative to their fair value.
The first company is Wells Fargo & Co. (WFC, Financial). The San Francisco-based bank's shares closed at $45.59 on Friday for a market capitalization of $204.90 billion. The stock has an earnings yield of 9.9% versus the industry median of 8.1% and a price-earnings ratio of 10.09 versus the industry median of 12.36.
Wells Fargo also has a price-book ratio of 1.20 versus the industry median of 1.11 and a price-sales ratio of 2.56 versus the industry median of 3.01.
GuruFocus assigned a rating of 4 out of 10 for the bank's financial strength and a rating of 3 out of 10 for its profitability and growth.
The stock has fallen 1.1% year to date, underperforming the S&P 500 index by 16.3%. The 52-week range is $43.02 to $59.53.
According to the Peter Lynch chart, the stock is undervalued.
The second company is SoftBank Group Corp. (SFTBF, Financial). Shares of the Japanese telecommunication services company closed at $92.86 on Friday for a market capitalization of $95.60 billion. The stock has an earnings yield of 13.95% versus the industry median of 5.2% and a price-earnings ratio of 7.17 versus the industry median of 19.33.
The stock also has a price-book ratio of 1.38 versus the industry median of 2.07, a price-sales ratio of 1.15 versus the industry median of 1.5 and an enterprise value-Ebitda ratio of 5.82 versus the industry median of 8.29.
GuruFocus assigned a rating of 4 out of 10 for the company's financial strength and a 7 out of 10 rating for its profitability and growth.
Wall Street issued a buy recommendation rating with an average price target of $130.16 per share.
The stock has gained 42.4% so far this year, outperforming the S&P 500 index by 27.2%. The 52-week range is $62.59 to $112.50.
The Peter Lynch chart suggests the stock is undervalued.
The third company is Chesapeake Energy Corp. (CHK, Financial). Shares of the Oklahoma City-based oil and gas producer closed at $1.77 on Friday with a market capitalization of about $2.89 billion. The stock has an earnings yield of 27.7% versus the industry median of 8.5% and a price-earnings ratio of 3.61 versus the industry median of 11.83.
Further, the stock has a price-book ratio of 1.01 versus the industry median of 1.3 and an enterprise value-Ebitda ratio of 7.19 compared to the industry median of 7.99.
GuruFocus assigned a rating of 4 out of 10 for the company's financial strength and a 5 out of 10 rating for its profitability and growth.
For sell-side analysts, the stock will underperform within 52 weeks. However, the average target price of $2.98 reflects 69.3% upside from the closing price on Friday that is expected to be reached within the same period of time.
So far this year, the stock has fallen 15.71%, underperforming the S&P 500 index by nearly 31%. The 52-week range is $1.71 to $5.60.
The Peter Lynch chart indicates the stock is undervalued.
Disclosure: I have no positions in any securities mentioned.
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