To find value opportunities, investors should look for stocks with earnings yields that at least double the returns of 20-year high-quality market corporate bonds.
The bonds represent corporate loans issued by triple-A, double-A and single-A-rated companies. These companies are unlikely to have financial problems. As a result, the related bonds imply a very low investment risk for their holders.
The Federal Reserve Bank of St. Louis indicated the 20-year bond’s monthly average spot rate is 3.82%. Thus, the earnings return of the following companies exceeds the 7.64% rate corresponding to a price-earnings ratio of less than 13.09 as of Aug. 23.
In addition, these large caps stocks are not expensive based on the Peter Lynch value.
EOG Resources Inc. (EOG, Financial) closed at $71.75 on Friday for a market capitalization of $41.66 billion. The Houston, Texas-based oil and gas explorer and producer has an earnings yield of 8.57% versus the industry median of 13.83% or a price-earnings ratio of 11.67 versus the industry median of 7.23.
The price-book ratio is 2.02 versus the industry median of 0.88, and the enterprise value-Ebitda ratio is 5.51 versus the industry median of 5.
The stock has lost 17.71% so far this year. The share price at close on Friday was 0.6% above the 52-week low of $71.36 and 86.1% below the 52-week high of $133.53.
The stock appears to be not expensive based on the Peter Lynch chart.
GuruFocus assigned a score of 6 out of 10 for the company's financial strength rating and profitability and growth rating.
The stock has an overweight recommendation rating and an average target price of $109.99 per share, reflecting nearly 53.3% growth from the closing price on Friday.
Mitsui & Co. Ltd. (MITSY, Financial) closed at $300.2 per share at close on Friday for a market capitalization of $26.63 billion. Based in Tokyo, Mitsui & Co. is a worldwide trader of energy, steel products and chemicals. The stock has an earnings yield of 14.84% versus the industry median of 13.83% or a price-earnings ratio of 6.74 versus the industry median of 7.23.
The stock also has a price-book ratio of 0.67 versus the industry median of 0.88, a price-sales ratio of 0.40 versus the industry median of 1.64 and an enterprise value-Ebitda ratio of 7.71 compared to the industry median of 5.
The share price declined 3.30% year to date. The closing share price on Friday was 6.2% above the 52-week low of $282.64 and 23.9% below the 52-week high of $371.95.
According to the Peter Lynch chart, the stock appears cheap.
GuruFocus assigned a score of 5 out of 10 for the company’s financial strength rating and profitability and growth rating.
The stock has an overweight recommendation rating and an average target price of $389.22 per share, representing 29.7% growth to hit within 52 weeks.
Imperial Brands PLC (IMBBY, Financial) closed at $25.08 per share on Friday with a market capitalization of $24.01 billion. The U.K.-based tobacco producer has an earnings yield of 7.93% versus the industry median of 6.98% or a price-earnings ratio of 12.61 versus the industry median of 14.32.
The stock also has a price-book ratio of 3.99 versus the industry median of 3.44 and a price-sales ratio of 0.64 versus the industry median of 2.3.
The stock has fallen 17.82% so far this year. The closing share price on Friday was 7.8% above the 52-week low of $23.27 and 46.7% below the 52-week high of $36.78.
The Peter Lynch chart suggests the stock is not expensive.
GuruFocus assigned a financial strength rating of 5 out of 10 and a profitability and growth rating of 8 out of 10.
The stock has an overweight recommendation rating and an average target price of $34.16 per share, reflecting a 36.2% increase from the closing price on Friday.
Disclosure: I have no positions in any securities mentioned.
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