The popular Discounted Cash Flow (DCF) model requires a number of assumptions on future cash flow, terminal growth rate and discount rate. Beautiful as it is mathematically, the model will not readily work if a company does not have positive initial free cash or that from the past 12 months. Believe me, companies do make negative free cash flows, sometimes not due to their own faults. Obviously, companies making negative free cash flows in the immediate past do not warrant a negative intrinsic value.
Two alternative models circumventing the issues of DCF are devised here at GuruFocus to screen the stocks: Historical Low P/S and Historical Low P/B. The first screener divids the stock price against the sales of the company and identifies the companies that are near historical low P/S ratios, and the second looks for values among the stocks selling at a historical low discount against its book value.
Results are available for each model in real time. We also took the screening results at the beginning of the year and started to track the performances of these model portfolios. So far, both model portfolios are doing rather good: Since the beginning of the year, the S&P 500 index has declined 8.3% yet the Historical Low P/B portfolio is down only 2% and the Historical Low P/S bunch has lost only 0.2%. Although a six-month track record is probably too short to brag about, we would our members to keep an eye open and check back from time to time to scout out new entries for investment ideas in both lists.
Back to 25 companies for each strategy were taken at the beginning of 2010, not all companies registered a gain for the first six months. The outperformance was an weighted average, if I were you I would be looking for the companies that declined the most for investment candidates. For the Low P/B strategy, the following stocks declined the most during the first half:
Apollo Group Inc. (APOL, Financial)
Apollo Group, Inc. has been providing higher education to working adults for over 25 years. Apollo Group Inc. has a market cap of $6.33 billion; its shares were traded at around $41.86 with a P/E ratio of 8.19, P/B of 4.62 and P/S ratio of 1.59. Apollo Group Inc. had an annual average earning growth of 26.4% over the past 10 years. GuruFocus rated Apollo Group Inc. the business predictability rank of 4-star.
Baxter International Inc. (BAX, Financial)
Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. Baxter International Inc. has a market cap of $24.97 billion; its shares were traded at around $41.65 with a P/E ratio of 10.68, P/B of 3.75 and P/S ratio of 1.99. The dividend yield of Baxter International Inc. stocks is 2.79%. Baxter International Inc. had an annual average earning growth of 7.1% over the past 10 years. GuruFocus rated Baxter International Inc. the business predictability rank of 3.5-star.
Granite Construction Inc. (GVA, Financial)
Granite Construction, Inc. is a diversified heavy civil constractor and construction materials producer. Granite Construction Inc. has a market cap of $880.44 million; its shares were traded at around $22.69 with a P/E ratio of 29.09, P/B of 1.07 and P/S ratio of 0.45. The dividend yield of Granite Construction Inc. stocks is 2.29%. Granite Construction Inc. had an annual average earning growth of 11.7% over the past 10 years.
Verizon Communications Inc. (VZ, Financial)
Verizon Communications, formed by the merger of Bell Atlantic and GTE, is one of the world's providers of high-growth communications services. Verizon Communications Inc. has a market cap of $75.78 billion; its shares were traded at around $26.81 with a P/E ratio of 11.51, P/B of 0.9 and P/S ratio of 0.7. The dividend yield of Verizon Communications Inc. stocks is 7.09%. Verizon Communications Inc. had an annual average earning growth of 2.3% over the past 10 years.
WalMart Stores Inc. (WMT, Financial)
Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $178.06 billion; its shares were traded at around $48 with a P/E ratio of 12.73, P/B of 2.62 and P/S ratio of 0.44. The dividend yield of Walmart Stores Inc. stocks is 2.52%. Walmart Stores Inc. had an annual average earning growth of 11.1% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
To find the complete list of the model portfolio, click here.
To find the real time result for stocks selling at lowest P/B ratio in the company’s history, click here.
Two alternative models circumventing the issues of DCF are devised here at GuruFocus to screen the stocks: Historical Low P/S and Historical Low P/B. The first screener divids the stock price against the sales of the company and identifies the companies that are near historical low P/S ratios, and the second looks for values among the stocks selling at a historical low discount against its book value.
Results are available for each model in real time. We also took the screening results at the beginning of the year and started to track the performances of these model portfolios. So far, both model portfolios are doing rather good: Since the beginning of the year, the S&P 500 index has declined 8.3% yet the Historical Low P/B portfolio is down only 2% and the Historical Low P/S bunch has lost only 0.2%. Although a six-month track record is probably too short to brag about, we would our members to keep an eye open and check back from time to time to scout out new entries for investment ideas in both lists.
Back to 25 companies for each strategy were taken at the beginning of 2010, not all companies registered a gain for the first six months. The outperformance was an weighted average, if I were you I would be looking for the companies that declined the most for investment candidates. For the Low P/B strategy, the following stocks declined the most during the first half:
| Symbol | Company | # of Shares | Bought on | Share Cost | Current Price | Change | Value ($) |
|---|---|---|---|---|---|---|---|
| APOL | Apollo Group Inc. | 66 | 1/2/2010 | $60.58 | 41.86 | -30.90% | 2,763 |
| BAX | Baxter International Inc. | 68 | 1/2/2010 | $58.68 | 41.65 | -29.02% | 2,832 |
| GVA | Granite Construction Inc. | 119 | 1/2/2010 | $33.66 | 22.69 | -32.59% | 2,700 |
| VZ | Verizon Communications Inc. | 121 | 1/2/2010 | $33.13 | 26.81 | -19.08% | 3,244 |
| WMT | WalMart Stores Inc. | 75 | 1/2/2010 | $53.45 | 48 | -10.20% | 3,600 |
Apollo Group Inc. (APOL, Financial)
Apollo Group, Inc. has been providing higher education to working adults for over 25 years. Apollo Group Inc. has a market cap of $6.33 billion; its shares were traded at around $41.86 with a P/E ratio of 8.19, P/B of 4.62 and P/S ratio of 1.59. Apollo Group Inc. had an annual average earning growth of 26.4% over the past 10 years. GuruFocus rated Apollo Group Inc. the business predictability rank of 4-star.
Baxter International Inc. (BAX, Financial)
Baxter engages in the worldwide development, manufacture and distribution of a diversified line of products, systems and services used primarily in the health-care field. Baxter International Inc. has a market cap of $24.97 billion; its shares were traded at around $41.65 with a P/E ratio of 10.68, P/B of 3.75 and P/S ratio of 1.99. The dividend yield of Baxter International Inc. stocks is 2.79%. Baxter International Inc. had an annual average earning growth of 7.1% over the past 10 years. GuruFocus rated Baxter International Inc. the business predictability rank of 3.5-star.
Granite Construction Inc. (GVA, Financial)
Granite Construction, Inc. is a diversified heavy civil constractor and construction materials producer. Granite Construction Inc. has a market cap of $880.44 million; its shares were traded at around $22.69 with a P/E ratio of 29.09, P/B of 1.07 and P/S ratio of 0.45. The dividend yield of Granite Construction Inc. stocks is 2.29%. Granite Construction Inc. had an annual average earning growth of 11.7% over the past 10 years.
Verizon Communications Inc. (VZ, Financial)
Verizon Communications, formed by the merger of Bell Atlantic and GTE, is one of the world's providers of high-growth communications services. Verizon Communications Inc. has a market cap of $75.78 billion; its shares were traded at around $26.81 with a P/E ratio of 11.51, P/B of 0.9 and P/S ratio of 0.7. The dividend yield of Verizon Communications Inc. stocks is 7.09%. Verizon Communications Inc. had an annual average earning growth of 2.3% over the past 10 years.
WalMart Stores Inc. (WMT, Financial)
Wal-Mart Stores, Inc. is the world's largest retailer. Walmart Stores Inc. has a market cap of $178.06 billion; its shares were traded at around $48 with a P/E ratio of 12.73, P/B of 2.62 and P/S ratio of 0.44. The dividend yield of Walmart Stores Inc. stocks is 2.52%. Walmart Stores Inc. had an annual average earning growth of 11.1% over the past 10 years. GuruFocus rated Walmart Stores Inc. the business predictability rank of 5-star.
To find the complete list of the model portfolio, click here.
To find the real time result for stocks selling at lowest P/B ratio in the company’s history, click here.
