With the pace of 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 of 25 stocks that meet the following criteria:
- “The Prudent Speculator finds them sufficiently undervalued to warrant a purchase today.”
- Expected growth of earnings per share of at least 15% over the next 12 months.
- Forward price-to-earnings ratios below 20. (In comparison, the forward P/E for the S&P 500 Index
is a weighted 22.1, according to FactSet, up from 17.6 a year ago and 16.6 two years ago.)
- For non-financial companies, estimated increase in sales of at least 10% over the next 12 months.
The Prudent Speculator is published by Kovitz Investment Group of Chicago. Kovitz manages about $6 billion through value strategies mainly for private clients. Buckingham co-manages the Al Frank Fund
which is rated four stars (out of five) by investment-research firm Morningstar and follows strategies outlined in the Prudent Speculator.
Starting with a group of about 2,800 companies, the Prudent Speculator team applies proprietary screens to identify stocks that are “potentially undervalued” relative to the broad market. The list is narrowed by analyzing companies’ levels of cash, debt, debt-maturity schedules, debt-service costs, capital expenditures and profit margins.
Buckingham and his team then consider qualitative factors, such as brand positioning, to narrow their list to a group of about 120 stocks they recommend across five strategies covered in the newsletter.
The core Prudent Speculator strategy has the highest total return for the past 30 years among newsletters tracked by the Hulbert Financial Digest.
The case for value post-recession
In an interview, Buckingham cited data for the previous 14 economic recoveries following recessions that show value stocks tend to outperform the broader market:
In the chart above, the value and growth groups are as 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.
and Kulicke & Soffa Industries Inc.
both of which make equipment used by semiconductor manufacturers.
Here are the 25 stock meeting all the criteria. The companies are listed in alphabetical order:
Kovitz Investment Group, FactSet
Scroll the chart to see all the data, including the Prudent Speculator’s price targets.
The emphasis here is on increases in earnings per share. For value stocks — in this case, stocks trading at significantly lower forward P/E ratios than the S&P 500 Index — earnings increases can be expected to support higher stock prices, and maybe even higher P/E ratios, over the long term.
The chart includes expected increases in sales, but only for non-financial companies. A big driver for earnings growth for the banks is expected to be the release of loan loss reserves, as credit losses turn out to be lower than the companies prepared for during the first and second quarters of 2020. Higher loan demand would help too, as would a continual increase in spreads between long-term interest rates and short-term rates, as has happened in recent weeks.
Getting back to Cohu and Kulicke & Soffa Industries — two growth stocks that made the list — Buckingham said shares of most companies involved with semiconductor manufacturing had risen because of elevated demand.
“Their earnings have skyrocketed and are likely to continue to do so. The stock prices haven’t caught up to where the earnings are headed,” he said.
While dividend yields weren’t part of Buckingham’s selection criteria, you can see them if you scroll the table to the right. Stocks on the list with dividend yields higher than 3.5% include Comerica Inc.
Leggett & Platt Inc.
and Pfizer Inc.