By Mark Hulbert
Would you be interested in a stock whose value is a fraction of its peers’ that’s recommended for purchase by three of the top-performing value-focused investment newsletters I monitor?
The stock is Comerica (NYS:CMA) , the Dallas-based financial-services company. Its price-to-earnings (P/E) ratio is six, which is one-sixth that of the benchmark S&P 500 Index, when calculated on the basis of trailing earnings. It has a dividend yield of 5.6% versus 1.6% for the S&P 500 (S&P:SPX) .
Not interested in a company in the financial sector? Here are other stocks that also are recommended by three top value-focused newsletters, with P/Es well below the S&P 500’s:
I’m focusing on highly recommended value stocks because of this week’s renewed hope that the long-suffering value factor is finally beginning to reassert its historical dominance over growth. Over the past 90 years, as you may know, value stocks (those trading at low ratios of price to various measures of net worth and profitability) have significantly outperformed growth stocks (those trading at high ratios). Over 14 years, however, it’s been just the reverse.
The two groups’ relative returns Nov. 9 and 10 suggest that value may have finally begun to turn the corner. On those two days, value beat growth by a bigger margin than in any other two-day period in decades.
The prospect of the market’s leadership shifting from growth to value conjures up memories of what happened in the wake of the internet bubble bursting in early 2000. From the peak of the market in March of that year to the bottom in October 2002, many value stocks actually rose even as the most growth-oriented stocks (especially high-flying internet stocks) were crushed. To the extent you believe a similar shift in leadership could be imminent, now is a good time to focus on those value stocks that are most compelling.
To come up with my list, I followed a process. I first identified investment newsletters I monitor that have beaten the overall market for at least 20 years. Next, I narrowed this list of market beaters to those whose returns are most closely correlated with the value sector generally. (To measure those correlations, I relied on data from Dartmouth finance professor Ken French.) I next identified stocks that are recommended by more than one of the newsletters. Finally, I narrowed the list of stocks to those whose P/E or price/book ratios are well below those of the S&P 500 and whose dividend yields are above the market’s.
This multi-step process is important because sometimes value stocks, which by definition are out of favor, are disliked for a reason. If you buy such stocks, you risk falling into what’s known as a “value trap.” It’s in order to reduce this possibility that the table below includes only value stocks that top-performing advisers find attractive.
Here’s the list. It includes the four stocks mentioned above, which are recommended by three of the top-performing value-focused advisers. And it also includes the 10 stocks recommended by two of them with the lowest P/E ratios. The table of 14 stocks is sorted first according to the number of newsletters recommending the stocks and then according to the stocks’ P/E ratio.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at email@example.com