8 Undervalued Stocks Getting Help From the U.S.

BOSTON (TheStreet) -- Conservative investors may well want to consider stocks with the highest market values, especially those with a U.S. focus.

An analysis of their valuations by Fidelity Investments concludes they are selling at 20-year lows and "appear significantly undervalued" and, thus, ready for a breakout after a decade of middling performance.

Mega-cap stocks, represented in the study by the 200 biggest companies in the Russell 1000 Index, have traded at an average trailing price-to-earnings (P/E) ratio of about 19 over the past 20 years, but currently have a P/E of less than 14, a low for the 20-year period. They would need to rise more than 20% just to revert back to their historical norm, the report said.

And on a relative valuation basis, they are also trading at a 20%-plus discount to midcap stocks now.

Matt Fruhan, one of the report's authors and portfolio manager of the $1.8 billion Fidelity Mega-Cap Stock Fund ( FGRTX), wrote that, adding to their appeal, the mega caps are typically stocks of high-quality, predictable companies paying healthy dividends. And they're clearly in a position to increase them, given that as of mid-July, the companies in the study had a trailing 12-month free cash flow yield of 6.5% and a dividend yield of only 2.2%, which gives them plenty of room "to close that gap and substantially increase their dividend payout."

"If this valuation gap persists and tax policy continues to treat dividends similarly to capital appreciation, which we should know more about after the fall elections, we expect some management teams to shift free cash flow away from buying back shares in favor of returning capital to shareholders in the form of dividends," said the report's co-author, Fidelity institutional portfolio manager Naveed Rahman. "The opportunity to increase dividends substantially is one of the many reasons we believe mega caps are so attractive."

The report concludes that "the recent extended underperformance against midcaps, suggests that the equity market may be poised for another shift in leadership toward mega caps," although for now, the biggest stocks are "persistently under-owned" by most active investors, even those with portfolio allocations to large-cap mutual funds.

The Fidelity Mega-Cap fund is up 11.8% this year versus the S&P 500's 10% gain, and it is up an average 14% annually over three years, about that of the S&P 500's performance.

The fund's top five holdings, making up almost 21% of its portfolio, include iPhone maker Apple ( AAPL), banking giant Wells Fargo ( WFC), investment house JPMorgan Chase ( JPM), oil and chemicals conglomerate ExxonMobil ( XOM), and another oil giant, Chevron ( CVX).

To take a conservative mega-cap investment approach a step further, investors may find a xenophobic strategy of picking the stocks of those companies with most of their revenues coming from domestic sources a way to further mitigate risk, given Europe's sovereign debt miasma and China's wobbly economy.

With that in mind, here are eight stocks in the Fidelity Mega-Cap Fund with a decidedly domestic focus to their revenue sources, in inverse order of their share-price gains this year:

8. Occidental Petroleum ( OXY)

Company profile: Occidental, with a market value of $72 billion, is one of the largest oil and gas companies in the U.S., although it has global exploration and production operations. Its subsidiary, OxyChem, is one of the biggest marketers of chlorine and caustic soda. U.S. sales made up 63% of 2011's sales, followed by the Middle East and North Africa, at 33%.

Dividend Yield:2.43%. Note that Occidental has raised its dividend every year since 2002.

Investor takeaway: Its shares are down 5% this year, but have a three-year, average annual return of 9%. Analysts give its shares 11 "buy" ratings, five "buy/holds," and six "holds," according to a survey of analysts by S&P. S&P has it rated "buy" with a $104 price target, which is a 17% premium to the current price.

Morningstar analyst Allen Good wrote last week that while the company reported lower second-quarter earnings of $1.3 billion versus $1.8 billion last year (due primarily to lower oil and natural gas prices), it is making progress in "getting its operations on track and driving volume growth, particularly in the U.S.," which has been a recent focus.

7. WellPoint ( WLP)

Company profile: WellPoint, with a market value of $18 billion, is the largest managed health organization in the U.S. It offers various network-based managed care plans to large and small employers, individuals, and Medicaid programs.

Dividend Yield: 2.1%

Investor takeaway: Its shares are up 11% this year and have a three-year, average annual return of 7.4%. Analysts give its shares seven "buy" ratings, four "buy/holds," and nine "holds," according to a survey of analysts by S&P.

S&P has it rated "buy" with a 12-month price target of $68, a 26% premium to the current price. For fiscal year 2012, analysts' consensus earnings estimate is for $7.38 per share and growth of 12% to $8.24 per share next year.

6. Walgreen ( WAG)

Company profile: Walgreen, with a market value of $31 billion, is the largest U.S. retail drug chain in terms of revenue, and owns more than 8,000 drug stores throughout the U.S. The Fidelity Mega-Cap Fund has been a recent buyer.

Dividend Yield: 2.48%

Investor takeaway: Its shares are up 11% this year and have a three-year, average annual return of 7.4%. Analysts give its shares four "buy" ratings, five "buy/holds," 12 "holds," one "weak hold," and three "sells," according to a survey of analysts by S&P.

Analysts' consensus estimate if for earnings of $2.60 per share this year, and $3.01 next year, or 16% growth. It's seen as benefiting from the aging populace and its need for more prescriptions, but is in a highly competitive and consolidating industry, which could hurt its sales in the long run.

5. Time Warner ( TWX)

Company profile: Time Warner, with a market value of $38 billion, owns some of the world's leading media and entertainment brands, including Warner Bros. (film/TV studio), Turner cable networks (TNT, TBS, CNN), the HBO/Cinemax premium channels, as well as several magazine brands through its Time Inc. publishing businesses. It generates about 30% of sales from outside the U.S.

Dividend Yield: 2.63%

Investor takeaway: Its shares are up 11% this year and have a three-year, average annual return of 19%. Analysts give its shares 11 "buy" ratings, 12 "buy/holds," and nine "holds," according to a survey of analysts by S&P.

Analysts' consensus estimate is for earnings of $3.20 per share this year and $3.63 next year, or 13% growth. S&P has it rated "buy" with a $44 price target, which is an 8% premium to its current price.

4. McKesson ( MCK)

Company profile: McKesson, with a market value of $21 billion, is a distributor of pharmaceuticals, medical and surgical supplies, and health- and beauty-care products in North America. It also provides software related to pharmacy services, medical records, patient care, and financial management. The company gets about 86% of its operating profit from distributing pharmaceuticals and medical and surgical supplies. It was recently renewed as the lead supplier to the Veterans Administration, a deal that is seen bringing in over $31 billion in revenue over the next eight years.

Dividend Yield: 0.87%

Investor takeaway: Its shares are up 15% this year and have a three-year, average annual return of 21%. Analysts give its shares seven "buy" ratings, seven "buy/holds," and five "holds," according to a survey of analysts by S&P. S&P has it rated "strong buy," with a $107 price target, which is a 16% premium to its current price.

3. Target ( TGT)

Company profile: Target, with a market value of $41 billion, operates 1,515 discount general merchandise stores and 252 SuperTargets in North America. Its July same-store sales rose 3.1%.

Dividend Yield: 2.34%

Investor takeaway: Its shares are up 19.5% this year, and have a three-year, average annual return of 13%. Analysts give its shares 10 "buy" ratings, five "buy/holds," and 12 "holds," according to a survey of analysts by S&P. S&P has a "strong buy" rating and $72 price target on its shares, which is a 16% premium to the current price. Analysts' consensus estimate is for earnings of $4.35 per share this year and $4.86 per share next year, or 12% growth.

2. Wells Fargo ( WFC)

Company profile: Wells Fargo, with a market value of $180 billion and a customer asset base of $1.3 trillion, is the fourth largest bank in the U.S. It provides banking, insurance, investment, mortgage and consumer finance services. The company is the Fidelity Mega-Cap Fund's second-largest holding, at 4.2% of the portfolio.

Dividend Yield: 2.6%

Investor takeaway: Its shares are up 24% this year and have a three-year, average annual return of 21 %. Analysts give its shares 15 "buy" ratings, nine "buy/holds," eight "holds," and one "sell," according to a survey of analysts by S&P. It reported net income of $4.6 billion, or 82 cents per share, in the second quarter, up 9% from the first quarter and 17% year over year. Analysts' consensus estimates are for earnings of $3.31 per share this year, and rising 10% to $3.65 next year.

1. Comcast ( CMCSK)

Company profile: Comcast, with a market value of $90 billion, is the largest operator in the cable industry as its networks reach 53 million households, serving 22 million video, 18 million Internet, and 9 million phone customers. It's the Fidelity Mega-Cap Fund's eighth-largest holding at 2.5%.

Dividend Yield: 1.68%

Investor takeaway: Its shares are up 40.7% this year and have a three-year, average annual return of 35%. Analysts give its shares two "buy" ratings, three "buy/holds," and one "hold," according to a survey of analysts by S&P.

Comcast's second-quarter profit rose 32% and its NBCUniversal business said it might break even on its Olympics coverage as it surpassed its Olympics advertising-sales goal by $100 million. Analysts' consensus estimate is that it will earn $1.92 per shares this year, and grow that by 15% to $2.20 next year.

Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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