Situation: The market’s overpriced, so let’s see what’s in the bargain basement. There we’ll find value stocks, namely those that sell for no more than twice the rational price (Graham Number), are valued at no more than 25 times 7-yr P/E, and have a market capitalization of no more than 6 times Book Value. An A-rated company must: 1) be listed in Vanguard’s High Dividend Yield Index ETF (VYM), 2) have a 20+ year trading history on a US stock exchange, 3) issue bonds rated A- or better and 4) a stock rated B+/M or better by S&P, 5) a positive Book Value for the most recent quarter (mrq), and 6) positive earnings for the Trailing Twelve Months (TTM).
Mission: Use our Standard Spreadsheet to analyze companies that meet criteria.
Execution: see Table of 22 companies.
Analysis: Warren Buffett’s favorite metric is addressed in Column R of the Table: Return on Net Tangible Capital Employed. He thinks anything over 20% for the last fiscal year (lfy) is a good number. Intel (INTC) is the only company meeting that standard. His second point -- that the company is “run by able and honest managers” -- is addressed in Morningstar reports (see Column AP) and is negatively impacted by the degree to which managers capitalize the company by issuing long-term bonds rather than common stock (see Column W). Four companies (ATO, AEP, INTC, ED) have a BUY rating from Morningstar; 17 companies have Long-Term Debt to Equity ratios (Column W) less than 1.0 (PGR, ATO, AFL, ADM, SNA, INTC, BK, TFC, USB, CB, NTRS, TRV, RTX, PNC, CMI, GD, STT). Mr. Buffett has also stated that high Free Cash Flow Yield (Column I) reflects good management because Retained Earnings allow the company to expand (or pay down debt) at zero cost. 17 companies (PGR, AFL, SNA, JPM, MET, INTC, BK, CMCSA, TFC, USB, CB, NTRS, TRV, PNC, CMI, GD, STT) have Retained Earnings after dividend payouts. His third point -- that the stock be available “at a sensible price” -- is addressed by the 1-yr and 5-yr Forward PEG ratios (see Columns M and N): 6 companies have PEG ratios under 2.0 at both time points (BK, CMCSA, CB, RTX, CMI, STT). Managers are also respected for conserving cash, meaning operating expenses do not exceed 45% of net sales (Column Z). 9 companies meet this Operating Ratio standard (JPM, INTC, BK, CMCSA, TFC, USB, NTRS, PNC, STT). 12 companies are members of The 2 and 8 Club (bolded in Column J): ATO, AFL, SNA, JPM, BK, CMCSA, TFC, USB, NTRS, PNC, GD, STT. Sustainability is also important (see Column Q). Only 7 companies are likely to avoid steeper losses than the S&P 500 ETF (SPY) in the next market crash (ATO, AEP, AFL, ED, CB, TRV, RTX). INTC, BK, STT are each cited 5 times.
Bottom Line: Most of these companies are in the Financial Services industry, including 7 banks. Over the past 5 years, stock prices for all 7 banks have been more volatile than those for SPY. Intel (INTC) is the only company that shines in our analysis and also has low volatility (see Column K). All 22 companies raise concerns among investors, which is why their stocks are in the bargain basement in the first place. So, you’ll have to sort through those concerns before buying. Morningstar is a good place to start.
Risk Rating: 7 (where 10-yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into AEP, JPM, INTC, USB and RTX, and also own shares of CMCSA, CMI, GD and STT.
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