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Sydnee Gatewood
Sydnee Gatewood
Articles (901) 

5 Industrial Companies to Consider as Trade Talks Resume

Stocks are trading below Peter Lynch value

September 12, 2019 | About:

While the trade war between the U.S. and China trudges on, several industrial companies have started to feel the effects. Deere & Co. (NYSE:DE) is among those who have been most significantly impacted as farmers are delaying buying new equipment on the back of uncertain demand for their crops. In addition, steel prices are affecting production costs.

On Wednesday, President Trump announced he would delay some tariff increases ahead of a new round of negotiations in October. In return, China agreed to scrap some of its tariff plans as well.

As a result, value investors may find good opportunities among industrial companies that are trading below Peter Lynch value.

The renowned investor developed this method in order to simplify his investment process. With the belief good, stable companies eventually trade at 15 times their annual earnings, Lynch set the standard at a price-earnings ratio of 15. Stocks trading below this level are often good investments since their share prices are likely to appreciate over time, creating value for shareholders. In addition, the GuruFocus All-in-One screener looked for companies that have business predictability ranks of two or more stars and have seen their revenue per share grow by at least 6% over the last decade.

Based on these criteria, the screener found stocks that met these criteria as of Sept. 12 included Southwest Airlines Co. (NYSE:LUV), Mastech Digital Inc. (MHH), Synnex Corp. (NYSE:SNX), JetBlue Airways Corp. (NASDAQ:JBLU) and Cummins Inc. (NYSE:CMI).

Southwest

The Dallas-based airline has a $29.41 billion market cap; its shares were trading around $54.84 on Thursday with a price-earnings ratio of 12.66, a price-book ratio of 3.04 and a price-sales ratio of 1.36.

The Peter Lynch charts suggests the stock is undervalued since it is trading below its fair value.

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GuruFocus rated Southwest’s financial strength 6.6 out of 10, driven by comfortable interest coverage and a high Altman Z-Score of 3.08, which indicates the company is in good financial health.

The company’s profitability and growth fared better, scoring an 8 out of 10 rating. In addition to an expanding operating margin, Southwest is supported by strong margins that outperform a majority of competitors, consistent earnings and revenue growth and a moderate Piotroski F-Score of 4, which implies business conditions are stable. The airline has a business predictability rank of five out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 12.1% per annum over a 10-year period.

Of the gurus invested in Southwest, PRIMECAP Management (Trades, Portfolio) has the largest stake with 13.61% of outstanding shares. Other top guru shareholders include Warren Buffett (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, the T Rowe Price Equity Income Fund (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Pioneer Investments (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and NWQ Managers (Trades, Portfolio).

Mastech Digital

The information technology and employment services company, which is headquartered in Pittsburgh, has a market cap of $65.10 million; its shares were trading around $5.90 on Thursday with a price-earnings ratio of 7.02, a price-book ratio of 1.56 and a price-sales ratio of 0.37.

According to the Peter Lynch chart, the stock is undervalued.

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Mastech Digital’s financial strength was rated 5.5 out of 10 by GuruFocus. As a result of issuing approximately $19.54 million in new long-term debt over the past three years, the company has poor interest coverage. The robust Altman Z-Score of 3.72, however, suggests it is in good financial standing.

The company’s profitability and growth scored a 7 out of 10 rating. Although the operating margin is in decline, the return on equity and return on assets outperform over half of industry peers. Mastech is also supported by steady earnings and revenue growth as well as a moderate Piotroski F-Score of 4. It has a 4.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 10.6% per year.

Simons’ firm holds 0.51% of Mastech’s outstanding shares.

Synnex

The Fremont, California-based company, which provides IT supply chain services, has a $5 billion market cap; its shares were trading around $95.49 on Thursday with a price-earnings ratio of 12.15, a price-book ratio of 1.37 and a price-sales ratio of 0.2.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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GuruFocus rated Synnex’s financial strength 5.4 out of 10. Having issued approximately $2 billion in new long-term debt over the past three years, the company has insufficient interest coverage. Regardless, the Altman Z-Score of 3 suggests it is in good standing financially despite recording a decline in revenue per share over the past 12 months.

The company’s profitability and growth scored a 7 out of 10 rating on the back of an expanding operating margin, a moderate Piotroski F-Score of 4 and a four-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.8% per year.

With 4.18% of outstanding shares, Sarah Ketterer (Trades, Portfolio) is Synnex’s largest guru shareholder. Other top investors include Simons’ firm, Pioneer, Jeremy Grantham (Trades, Portfolio), Jones and Scott Black (Trades, Portfolio).

JetBlue Airways

The low-cost airline, which is headquartered in New York, has a market cap of $5.01 billion; its shares were trading around $17.10 on Thursday with a price-earnings ratio of 11.98, a price-book ratio of 1.09 and a price-sales ratio of 0.67.

The Peter Lynch chart suggests the stock is undervalued.

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Supported by adequate interest coverage, JetBlue’s financial strength was rated 5.7 out of 10 by GuruFocus. The Altman Z-Score of 1.71, however, warns the company is in distress and could be at risk of bankruptcy.

The company’s profitability and growth fared much better, scoring an 8 out of 10 rating on the back of operating margin expansion, consistent earnings and revenue growth and a moderate Piotroski F-Score of 5. JetBlue also has a 3.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

PRIMECAP has the largest stake in JetBlue with 7.49% of outstanding shares. Donald Smith (Trades, Portfolio), Simons’ firm, Richard Snow (Trades, Portfolio), Ainslie, Hotchkis & Wiley, Pioneer, Robert Olstein (Trades, Portfolio) and Philippe Laffont (Trades, Portfolio) are also shareholders.

Cummins

The Columbus, Indiana-based company, which manufactures engines, filtration systems and power generation products, has a $26.11 billion market cap; its shares were trading around $165.49 on Thursday with a price-earnings ratio of 10.01, a price-book ratio of 3.13 and a price-sales ratio of 1.07.

According to the Peter Lynch chart, the stock is undervalued.

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GuruFocus rated Cummins’ financial strength 7.1 out of 10. Although the company has issued approximately $198 million in new long-term debt over the past three years, it is at a manageable level due to comfortable interest coverage. The strong Altman Z-Score of 4.37 also indicates the company is in good financial health.

The company’s profitability and growth scored an 8 out of 10 rating, driven by margins and returns that outperform more than half of its competitors as well as steady earnings and revenue growth. In addition, Cummins is supported by a high Piotroski F-Score of 7, which suggests operating conditions are healthy, and a 3.5-star business predictability rank.

Of the gurus invested in Cummins, Hotchkis & Wiley has the largest position with 1.67% of outstanding shares. Other top guru shareholders include First Eagle Investment (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Pioneer, the Parnassus Endeavor Fund (Trades, Portfolio), Greenblatt, Simons’ firm, the Smead Value Fund (Trades, Portfolio), Grantham, Olstein, Chuck Royce (Trades, Portfolio), Jones, Steven Cohen (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Caxton Associates (Trades, Portfolio).

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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