I’m using the word “cheap” here in the sense that Benjamin Graham used it when he wrote the classic investment tomes Security Analysis and The Intelligent Investor. He was talking about the value an investor receives for the amount of money paid as measured in terms of earnings and related factors.
So, it’s not necessarily the kind of analysis that seeks to uncover “innovation” or “visionary thinking.” This initial screen finds stocks with price/earnings ratios below that of the market average, trading below book value, showing a decent earnings record and paying dividends.
Popular is a NASDAQ-traded bank based in Puerto Rico that serves that island as well as Caribbean and Latin American locations.
The company makes it through the cheap stock screen by virtue of a price/earnings ratio of 8 and that it can be purchased at an 8% discount to its book value. Earnings were great this past year and the 5-year record is positive. Long-term debt is less than shareholder equity. Popular pays a 2.15% dividend yield.
Capital One Financial Corporation is another NYSE-listed firm in the credit services sector.
With a price/earnings ratio of 8.9 and going at a 10% discount to book value, the stock looks classically cheap. To be sure, their financials might require a close look as shareholder equity is exceeded by the amount of long-term debt. Capital One is paying a 1.6% dividend.
CIT Group is another NYSE-listed stock in the credit services field — in business since 1908.
The stock is now selling at at 24% discount to book value. The price/earnings ratio is 9. It’s a concern that long-term debt exceeds shareholder equity. Earnings were excellent this year and it’s been positive on a 5-year basis as well. CIT pays a 3.06% dividend.
Hollysys Automation Technologies is NASDAQ-traded and headquartered in China.
The price/earnings ratio is 7 and it’s trading at an 8% discount to book value. The company has no long-term debt. Earnings have been good this year and the 5-year record is good, too. Hollysys pays a 1.41% dividend. Average daily volume is relatively light at 220,000 shares.
KT Corporation is a South Korean telecom firm that trades on the New York Stock Exchange.
The stock goes for about half of its book value and with a price/earnings ratio of 10. The earnings record is excellent whether you look at this year or at the 5-year track record. Shareholder equity is greater than long-term debt. KT pays a 4.07% dividend.
Because of the relative apparent value, these types of stocks are often followed by certain large institutions, such as hedge funds, looking for buy-out or merger possibilities. Typically, these situations are beaten down because they happen to be in an unpopular sector or something specific is considered a negative, individually.
Exciting growth prospects are not the idea. It’s the type of investment thinking that may require patience. In the meantime, it’s nice to be receiving dividends, some greater than the 30-year Treasury yield, while the wait plays out. Other stocks showed up on this screen — I’m showing the first 5 that came up just as examples.
