Stocks plummeted following Federal Reserve Chairman Ben Bernanke's Wednesday announcement of the central bank's plans to reduce its stimulus efforts. The Dow Jones fell by 2.34%, which is the index’s biggest one-day point drop since November 2011. The S&P 500 also experienced its worst drop since November 2011, plummeting by 2.50%. Meanwhile, the Nasdaq sank by 2.28%.
While many investors were unnerved by Bernanke’s remarks, billionaire investor Ken Fisher expressed satisfaction with the central bank’s plans. In an interview with Bloomberg, Fisher states that reducing the stimulus will expedite the economy’s growth. Fisher believes that as interest rates shift in response to the Fed’s actions, banks will give more loans to companies. Fisher also told Bloomberg that widespread lack of confidence in the U.S. economy is why the country is only in the middle of its stock market rally, which began in 2009.
Given Fisher’s optimism about the economy, we decided to take a look at his portfolio. Specifically, we decided to run a screen for profitable stocks that are undervalued. If Fisher is right about being in the middle of a bull market, these stocks may not be undervalued for much longer.
To begin, we constructed a universe of stocks comprised of Fisher’s holdings as of March 31st. The stocks, which we found on Guru Focus, were included in Fisher Asset Management's Q1 2013 13F SEC filing.
We then looked for stocks with increasing profitability as indicated by rising diluted normalized earnings per share (EPS) for the past three consecutive years. EPS refers to the amount of profit alloted per outstanding share of common stock. Diluted normalized EPS differs from normalized EPS by taking convertible securities into consideration. Examples of convertible securities include options, warrens, and convertible preferred shares that could be exercised as well as lower net income. As a result, diluted normalized EPS tends to be both lower and more conservative than normalized EPS.
Next, we narrowed down that group by looking for stocks undervalued relative to their cash flows, which is indicated by high ratios of levered free cash flow/enterprise value. Levered free cash flow refers to a the free cash flow that remains after a company deducts interest payments on outstanding debt. Enterprise value is a valuation measurement calculated by adding market cap, debt, minority interest, and preferred shares (excluding total cash and cash equivalents). Levered free cash flow/enterprise values ratios exceeding 10% may indicate that the company, as a whole, is being undervalued.
Do you think now is the time to invest in these stocks? Use this list as a starting point for your own analysis.
1. Comcast Corporation (CMCSA, Earnings, Analysts, Financials): Provides entertainment, information, and communications products and services in the United States and internationally. Market cap at $102.49B, most recent closing price at $38.91.
2. CONMED Corporation (CNMD, Earnings, Analysts, Financials): Provides surgical devices and equipment for minimally invasive procedures and monitoring. Market cap at $856.75M, most recent closing price at $30.46.
3. Coinstar, Inc. (CSTR, Earnings, Analysts, Financials): Provides automated retail solutions primarily in the United States, Canada, Puerto Rico, the United Kingdom, and Ireland. Market cap at $1.57B, most recent closing price at $57.09.
4. HollyFrontier Corporation (HFC, Earnings, Analysts, Financials): Operates as an independent petroleum refiner and marketer in the United States. Market cap at $8.72B, most recent closing price at $42.84.
5. Marathon Petroleum Corporation (MPC, Earnings, Analysts, Financials): Engages in refining, transporting, and marketing petroleum products primarily in the United States and internationally. Market cap at $24.42B, most recent closing price at $73.79.
6. Torchmark Corp. (TMK, Earnings, Analysts, Financials): Provides individual life and supplemental health insurance products, and annuities to middle income households. Market cap at $6.05B, most recent closing price at $64.63.
7. Time Warner Inc. (TWX, Earnings, Analysts, Financials): Operates as a media and entertainment company in the United States and internationally. Market cap at $52.54B, most recent closing price at $56.32.
(List compiled by Mary-Lynn Cesar. EPS data and FCF data sourced from Yahoo! Finance. All other data sourced from Finviz.)
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Analyze These Ideas: Getting StartedRead descriptions for all companies mentioned Access a performance overview for all stocks in the list Compare analyst ratings for the companies mentioned Compare analyst ratings to annual returns for stocks mentioned Real-Time Opinion: Scan the latest tweets about these companies (feed will open in a new window)
Dig Deeper: Access Company Snapshots, Charts, FilingsComcast Corporation (CMCSA, Chart, Download SEC Filings) CONMED Corporation (CNMD, Chart, Download SEC Filings) Coinstar, Inc. (CSTR, Chart, Download SEC Filings) HollyFrontier Corporation (HFC, Chart, Download SEC Filings) Marathon Petroleum Corporation (MPC, Chart, Download SEC Filings) Torchmark Corp. (TMK, Chart, Download SEC Filings) Time Warner Inc. (TWX, Chart, Download SEC Filings)
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