One of the points we consistently reiterate to clients in meetings and emails is that the growth leaders of the 1990s have now become value stocks (and sectors), while the value sectors of the 1990s have become the momentum, over-owned-by-hedge-fund leadership groups of the 2000s. However, that doesn't mean you should completely turn your back on stocks you used to love. In fact, it can pay to continue to keep them on your radar.
Remember how you couldn't give away
U.S. Steel
(X)
and the basic commodity groups in the
Nasdaq blowoff period between the Long-Term Capital bottom in October 1998 and March 2000? Now the basic commodities are part of every retail portfolio, while financial services and technology -- the leadership sectors of the 1980s and 1990s -- trade like they carry pianos on their backs.
While we own some of the current favored sectors and groups in client portfolios, we haven't stopped updating spreadsheets and following fundamentals on a lot of former favorites that we continue to think offer great value for client portfolios.
What do all these stocks have in common?
- Most or all of the stocks possess "mega-cap" market capitalizations
- Earnings growth-rate expectations are modest at best, often single-digits, well below historical trends
- Cash-flow valuations are very cheap
- The stocks are trading at or near long-term technical support
- On the cocktail-party circuit, talking about any of these names will likely get you punched in the face
Let's take a look at three stocks that meet these criteria.
General Electric
(GE)
. The $340 billion "industrial" conglomerate is really a quasi-financial, but GE Capital has remained relatively unscathed during the subprime crisis.
In the 2007 fourth quarter, GE's organic revenue growth of 10% was its best in three years, with the star of the quarter being "infrastructure," and order growth of 18%. Analysts cut estimates after tepid revenue guidance in infrastructure, but forward estimates of $2.43 for '08 and $2.68 in '09 means GE is trading at 14 and 13 times, for expected growth of 10% in both 2008 and 2009.
Another metric that caught my eye was the $3.50 per share in four-quarter trailing cash from operations, which means GE is trading at less than 10 times cash-from-ops per share.
Also, while we don't normally buy stocks for a dividend, with GE's current 3.5% dividend yield (and with GE's cash generation, the dividend growth will continue), you could do worse. I would think it would take an expanding economy to move the needle on a $340 billion company, but with the stock around $34 a share, I believe a patient value investor will eventually be rewarded.
On a technical basis, GE is now oversold on the weekly chart, but looks to have good support around its 200-week moving average at $35.
Cisco Systems
(CSCO)
. Since its February 2008 earnings report with its weak revenue guidance, CSCO ($140 billion market cap) is trading like it has bottomed, and, like GE, CSCO appears to have good technical support at its 200-week moving average at $21.64 per share.
Also like GE, CSCO has a much more attractive valuation today than in March of 2000, trading at eight times enterprise value (EV) to four-quarter trailing cash from operations. In addition, four-quarter trailing cash from operations per share is $2.30, so -- on a cash-flow basis -- CSCO is attractively valued.
Earnings and revenue estimates were reduced for CSCO after the Feb '08 earnings report to just 11% "forward fourth-quarter" earnings growth vs. the 22%-28% growth the previous six quarters. Current analyst consensus is still calling for 16% earnings growth in fiscal '08 (ends July '08), but just 10% for fiscal '09, resulting in CSCO trading at 14 and 13 times the fiscal-year estimates.
Will corporate capex and, in particular, technology spending get cut to mid-single-digits? Tough to say, but the rate of deceleration won't be nearly as bad as 2000-2002, and the stock already discounts a lot of the anticipated slowdown.
Wal-Mart
(WMT)
. The last time we wrote about this $200 billion retail juggernaut
in November 2007, the stock was near $43 and looked busted. Its recovery toward $50 in a tough retail market is a plus, but it may not be entirely out of the woods.
However, here is the key. With one-year forward earnings estimates of $3.41 per share, WMT is trading at 14 times forward earnings for expected, depressed and below-trend 7%-8% earnings growth, and just 10 times enterprise value (EV) to four-quarter trailing cash from operations.
As forward earnings estimates have gradually come down from 15% in the late 1990s to projected 7%-8% annual growth, the stock has trended sideways, and the P/E multiple continues to compress. The stimulus package (via the tax refunds) will help the WMTs of the world, combined with the company looking to shrink growth in the U.S. store base to take some of the heat off the income and cash-flow statement.
The one element missing to this
Fed's easing cycle is that mortgage refis are not only not robust, but well below trend. WMT has been a big beneficiary of the refi boom in the past. However, the company has kept return-on-invested capital stable the last three to four years in the "mid-teens" range.
As Jim Cramer once said, the company has many levers (inventory, debt management, cash-flow and share repos and on the income statement, expenses, margins and pricing) to drive results.
Technically, WMT has been stuck in a trading range for eight years, peaking near $70 in 1999, and bottoming in the low $40s in '05, '06,and '07. In addition, WMT has been locked in a tighter $10-$12 trading range since mid 2005.
As Scott Rothbort has written, the long-term risk to WMT is political and regulatory: government "activists" that pander to the unions and special interest groups have beaten on the company for years. This is without a doubt the most efficiently run business in the U.S. Wal-Mart accounts for 10%-12% of all U.S. retail sales and does a wonderful job forcing their suppliers to be more efficient, so that WMT can offer consumers THE lowest price. The unions badly want in to what is currently the largest non-government U.S. employer, and if it happened, it would be the death knell for the retailer.
WMT becomes attractive if it trades back to the mid $40s on light volume. With $330 billion in annual sales, the company can't insulate itself from a severe pullback in consumer spending, but its aggressive expense control and margin management means the juggernaut can adjust to the changing economy very rapidly.
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