5 Undervalued-Predictable Companies With High Margins of Safety

As the summer 2019 season goes deep into the second month, GuruFocus’ value screeners continue identifying investing opportunities for the remaining five months of the year. The five undervalued-predictable companies with the highest margin of safety in terms of the discounted cash flow model are Alliance Data Systems Corp. (ADS, Financial), Tech Data Corp. (TECD, Financial), Sally Beauty Holdings Inc. (SBH, Financial), Credit Acceptance Corp. (CACC, Financial) and Packaging Corp of America (PKG, Financial).

The U.S. Bureau of Economic Analysis said on Friday that real gross domestic product increased at an annual rate of 2.1% during the quarter ending June 30, down 1% from real GDP growth during the previous quarter. Downturns in inventory investment, exports and nonresidential fixed investment contributed to the deceleration of GDP quarter over quarter.

Buffett’s indicator inches closer to all-time high

Berkshire Hathaway Inc. (BRK.A, Financial)(BRK.B) CEO Warren Buffett (Trades, Portfolio)’s favorite market indicator reached 147.6%, approximately 0.9% from its all-time high of 148.5% set in March 2020. Based on this market valuation level, the estimated market return per year, assuming valuations revert to the mean, is -2.4%.

While the Dow Jones Industrial Average closed at 27,192.45, approximately 167 points below its all-time high of 27,359.16 set on July 15, the Nasdaq Composite and Standard & Poor’s 500 index set new intraday highs, led by strong earnings from Google parent Alphabet Inc. (GOOGL, Financial)(GOOG), Twitter Inc. (TWTR, Financial) and Bill Ackman (Trades, Portfolio) holding Starbucks Corp. (SBUX, Financial).

Value screeners identify opportunities for remainder of the year

GuruFocus’ value screens, one of our most popular Premium features, continues to identify good investing opportunities for the remainder of the year, as the following table illustrates.

The Undervalued-Predictable model portfolio continues outperforming the benchmark, with a 13.01% annualized return over the past 10 years, compared to the S&P 500’s annualized return of 11.83% over the same period.

Alliance Data

With a current price of $158.88, Alliance Data has an 87% margin of safety according to the discounted cash flow model and a 61% margin of safety according to the discounted earnings model.

The Plano, Texas-based company offers marketing, loyalty program and private-label credit card services. GuruFocus ranks the company’s profitability 8 out of 10 on several positive signs, which include a return on equity that outperforms 93.77% of global competitors and a Joel Greenblatt (Trades, Portfolio) return on capital that outperforms 82.69% of global competitors. Additionally, the company has a five-star business predictability rank, suggesting strong and consistent revenue and earnings growth.

Despite strong profitability, Alliance Data’s financial strength ranks just 4 out of 10 on the heels of interest coverage below Benjamin Graham’s safe threshold of 5 and an Altman Z-score that suggests possible financial distress.

Gurus with large holdings in Alliance Data include Glenn Greenberg (Trades, Portfolio), Jerome Dodson (Trades, Portfolio)’s Parnassus Fund and Jeff Ubben (Trades, Portfolio)’s ValueAct Holdings.

Tech Data

With a current price of $101.94, Tech Data has a margin of safety of 70% based on the discounted cash flow model.

The Clearwater, Florida-based company brings products from technology vendors to the market and provides customers with logistics capabilities. GuruFocus ranks Tech Data’s profitability 7 out of 10 on several positive signs, which include business predictability rank of four stars and returns on equity that outperform 63.64% of global competitors. Additionally, Tech Data’s financial strength ranks 6 out of 10 as a strong Altman Z-score of 3.95 offsets interest coverage that is just slightly above Graham’s safe threshold of 5 and underperforms 72.64% of global competitors.

Sally Beauty

With a current price of $12.13, Sally Beauty has a margin of safety of 70% based on the discounted earnings model.

The Denton, Texas-based company offers various beauty products through two business segments: Sally Beauty Supply and Beauty Systems Group. GuruFocus ranks the company’s profitability 8 out of 10 on several positive signs, which include consistent revenue growth and operating margins that are outperforming 81.01% of global competitors despite declining 3.5% per year on average over the past five years.

Credit Acceptance

With a current price of $494.41, Credit Acceptance has a margin of safety of 52% based on the discounted cash flow model.

The Southfield, Michigan-based company offers financing for automobile loans. GuruFocus ranks the company’s profitability 9 out of 10 on several positive indicators, which include a strong Piotroski F-score of 7 and profit margins that are outperforming over 82% of global competitors. Additionally, the company has business predictability rank of 4.5 stars.

Packaging Corp

With a current price of $101.95, Packaging Corp has a margin of safety of 51% based on the discounted cash flow model.

The Lake Forest, Illinois-based company manufactures containerboard and corrugated packaging materials for smaller-sized companies. GuruFocus ranks the company’s profitability 9 out of 10 on several positive signs, which include a strong Piotroski F-score of 8, business predictability rank of five stars and operating margins that have increased 2.30% per year over the past five years and are outperforming over 90% of global competitors.

Disclosure: Author is long Alliance Data.

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