With new COVID-19 cases slowing, many investors expect economic growth to accelerate over the course of 2021. John Buckingham, editor of the Prudent Speculator newsletter, has provided a custom screen with 25 stocks that meet the following criteria:
“The prudent speculator finds them sufficiently undervalued to justify a purchase today.”
Expected earnings per share growth of at least 15% over the next 12 months.
Forward price / earnings ratio below 20. (In comparison, the forward P / E for the S&P 500 index
SPX, -1.31%
According to FactSet, this is a weighted 22.1 versus 17.6 a year ago and 16.6 two years ago.)For non-financial companies, an increase in sales of at least 10% is estimated over the next 12 months.
The Prudent Speculator is published by the Chicago-based Kovitz Investment Group. Kovitz manages approximately $ 6 billion through value strategies, mostly for retail clients. Buckingham is a co-administrator of the Al Frank Fund
VALUX, -0.37%,
The company is rated four (out of five) stars by investment research firm Morningstar and follows the strategies described in the Prudent Speculator.
Starting with a group of around 2,800 companies, the Prudent Speculator team uses proprietary screens to identify stocks that are “potentially undervalued” relative to the broader market. The list is narrowed down by analyzing the amount of cash and cash equivalents, debt, debt maturity schedules, debt servicing costs, investments and profit margins of the companies.
Buckingham and his team then consider qualitative factors such as brand positioning to narrow their list down to a group of around 120 stocks that they recommend in five strategies covered in the newsletter.
Prudent Speculator’s core strategy has the highest total return in 30 years of any of the Hulbert Financial Digest.
The case for the value after the recession
In an interview, Buckingham cited data for the last 14 post-recession economic rebounds showing that value stocks tend to outperform the broader market:
In the table above, the value and growth groups are defined by criteria developed by Eugene Fama and Kenneth French. NBER stands for the National Bureau of Economic Research, a research institute that defines when recessions occur.
Some growth stocks in the value camp
While Buckingham is a value investor, there are growth stocks that made the list including Cohu Inc.
COHU, -6.27%
and Kulicke & Soffa Industries Inc.
CALL, -1.47%,
Both make devices that are used by semiconductor manufacturers.
Here are the 25 stocks that meet all of the criteria. The companies are listed in alphabetical order:
Kovitz Investment Group, FactSet
Scroll through the chart to view all of the data including the Prudent Speculator’s price targets.
The focus here is on increasing earnings per share. For value stocks – in this case for stocks that trade with significantly lower forward P / E ratios than the S&P 500 index – increases in earnings are expected to result in higher stock prices and possibly even higher P / E ratios in the long term Support relationships.
The graph shows expected sales increases, but only for non-financial companies. A big driver of bank earnings growth is likely to be the release of credit risk reserves, as credit losses will be lower than the companies prepared for in Q1 and Q2 2020. A higher demand for credit would also help a steady increase in the spreads between long-term interest rates and short-term interest rates, as has happened in the past few weeks.
Going back to Cohu and Kulicke & Soffa Industries – two growth stocks that made the list – Buckingham said that most companies involved in semiconductor manufacturing had increased in stocks due to increased demand.
“Your earnings have skyrocketed and will likely continue to do so. Stock prices haven’t reached where profits are going, ”he said.
While dividend yields weren’t part of Buckingham’s selection criteria, you can see them by scrolling the table to the right. Stocks on the list with dividend yields greater than 3.5% include Comerica Inc.
CMA, -0.10%,
KeyCorp
KEY, -0.05%,
Leggett & Platt Inc.
LEG + 2.18%,
Newmont Corp.
NO, -1.64%
and Pfizer Inc.
PFE + 2.63%.
Do not miss: These selected industrial companies are expected to increase sales in 2021 from pre-pandemic levels
