Re: Valuations and Buy Candidates ...
In reviewing the holdings for the Old Folk Portfolio, going forward under the current condition of the market, I'm looking for companies that are not only selling at a discount to their "intrinsic value" but they must come highly rated by a majority of analysts for a Strong Buy or Buy.
The reason I am relying on buy ratings as much as I am, as opposed to considering any company selling at a steep discount to value is because some companies, due to company fundamentals deserve to sell off. There are companies selling off with strong company fundamentals but are doing so only because of short term political headwinds and the expected rising interest rates that should start next month.
Therefore, the companies I believe that will hold up the best are the companies that come highly rated and are selling at a discount to their intrinsic value using a "discounted cash flow" model.
Discounted Cash Flow and Intrinsic Value
The discounted cash flow (DCF) model is a commonly used valuation method to determine a company's intrinsic value. The DCF model uses a company's free cash flow and the weighted average cost of capital (WACC). WACC accounts for the time value of money and then discounts all its future cash flow back to the present day.
The weighted-average cost of capital is the expected rate of return that investors want to earn that's above the company's cost of capital. A company raises capital funding by issuing debt such as bonds and equity or stock shares. The DCF model also estimates the future revenue streams that might be received from a project or investment in a company. Ideally, the rate of return and intrinsic value should be above the company's cost of capital.
The future cash flows are discounted meaning the risk-free rate of return that could be earned instead of pursuing the project or investment is factored into the equation. In other words, the return on the investment must be greater than the risk-free rate. Otherwise, the project wouldn't be worth pursuing since there might be a risk of a loss. A U.S. Treasury yield is typically used as the risk-free rate, which can also be called the discount rate.
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The discounts listed below were determined by yesterday's closing prices, I'm not going to go back and update following today's price action. With this in mind, here my potential add on buys in the coming days.
Company .. FV Price .. Discount .. Analyst Ratings [1]
ABBV ...... $157.88 ..... 8% D.... Strong Buy 33-9-1
AEP ........ $116.40 .... 26% D ... Strong Buy 17-5-1
AVGO ..... $570.21 .... FV ......... Strong Buy 46-10-0
BMO ....... $185.22 ... 23% D ... Strong Buy 20-5-1
CM ......... $200.79 ... 23% D ... Strong Buy 23-10-0 [2]
NEE ....... $77.88 ..... 3% D ..... Strong Buy 23-9-0
TU .......... $27.96 .... 11% D .... Strong Buy 22-4-0
[1] Analyst Ratings: The first number represents Strong Buy or Buy, the second number represents Hold, and the third number represents Sell or Strong Sell.
[2] CM announced a 2 for 1 split today.
In addition to the above, I have a watchlist of companies with an A rating by Schwab but lack the valuation or enough analyst buy ratings yet.
According to Schwab:
A (Strongly Outperform): If an investor is looking to add a stock to his or her portfolio, "A" rated stocks may be the best candidates for consideration.
All of the companies listed below carry A ratings. I will list their intrinsic value numbers and analyst ratings.
Company .. FV Price .. Prem./Disc. [3] .. Analyst Ratings [4]
ABT ........ $101.73 .... 14% P ...... Strong Buy 24-3-2
AMGN .... $235.40 ... <7%> D .... Moderate Buy 15-28-3
GD ......... $201.88 .... 8% P ........ Moderate Buy 11-8-0
GPC ....... $141.30 .. <14%> D ... Moderate Buy 3-14-1
HD ......... $260.98 .... 17% P ...... Strong Buy 41-12-1
JNJ ........ $141.85 .... 10% P ...... Moderate Buy 15-12-0
MO ........ $66.70 ..... <26%> D ... Hold 5-13-5
ORI ....... $28.55 ..... <11%> D .... Hold 13-2-0 [5]
TD ........ $92.12 ..... <13%> D .... Moderate Buy 12-13-2
TGT ..... $232.69 ... <18%> D .... Moderate Buy 23-21-1
[3] P represents premium to intrinsic value, D represents discount to intrinsic value.
[4] Moderate Buy with a discount to intrinsic value indicates that not enough analysts have a Strong Buy or Buy rating yet but company fundamentals are strong enough to rate an A rating by Schwab. Moderate Buy may also be the result of valuations. |
