Volatility is back and that’s good. Finally, we get some action! Still, the future returns from stocks as an asset isn’t that great and it’s understandable that some people go for bonds or other “safe” assets. However, with my time horizon, I can’t afford to try to time the market and luckily, the market isn’t crazy about the kind of stocks that I like. That being said, it’s really hard to find good value when the S&P trades at close to a forward P/E 16.1 which is far above the 10-year P/E at 14.7
I continue to believe that at one point, probably in a down-trending market, people will start to favour value over growth. Then, boring and somewhat safer stocks will be much easier to hold than riskier assets such as the FANGs. But today I want to highlight the importance of focusing on not overpaying as well as trying to at least get a a small safety of margin. People love to quote Buffet and say “price is what you pay value is what you get” but I can assure you that Buffet would slap you in the face with a BigMac if you paid 60 times the earnings for a company that sells a boring (non growth) product such as toilet-paper or tooth-paste. Common people…
In my system, there’s a few equities trading at fair or even cheap prices. Do note that the US market is more expensive than the Nordic market, and most value cases can be found in Wastern Europe or in property-focused stocks. That being said, let’s see the menu.
A la carte Appetizers
Procter & Gamble (PG) is a classic dividend growth stock which is now trading at a fair price. I’m targeting a 3.37% yield which corresponds to a stock price at $82. The company trades at $78 which is 4.06% above my target, so it seems okey to consider PG now.
Home Depot (HD) is another strong dividend growth stock which I like. It’s a retailer, but with a very solid e-commerce pipeline. I do not see this stock breaking as of the IOT or Amazon. My target yield is 2.37% and the stock trades -2.87% compared to that. However, so small differences isn’t worth weighting that much when you have the time horizon that I have. In the long-term perspective, it’s the fundamental return from the company itself that will reward you as a shareholder. HD seems like a company worth considering.
A la carte Main Courses
Enbridge (ENB) is a company I’ve been buying a lot of lately. The debt is quite heavy and investors didn’t like it when management shifted from focusing on dividend growth to paying down debt. However, I like it. Debt is scary when interest goes up, because debt becomes more expensive. My target yield is 5.65% and ENB is actually trading at a yield at 6.81%, meaning a positive difference at 27%. Could be a value-trap, but I don’t think so.
Oaktree Capital (OAK) is another stock I like. They focus on distressed debt, which isn’t that bad considering we live in a world were everybody spends money they don’t have. Target price is $50 and the stock trades at $40, but I think the intrinsic value could be as much as $61. Anyhow, it’s never bad to have a double-digit safety of margin.
A la carte Desserts
Hormel Foods Corp – they haven’t really experienced any boost in its share price, even though they “earned” a lot of money. When I read the transcript from the CFO and the CEO, my trust only got strengthened that this company is doing good choices. Not cheap at all, but I’m feeling good if I get HRL close to $30-32.
I do like Kimberly-Clark (KMB), Medtronic, Omnicom, Equinix, and Starbucks. Most of these stocks are trading -5% to my target price, but whatever. As long as I don’t buy a super boring company selling toilet paper at a price to earnings ratio way above 30-40, it’s okay. A premium compared to the industry average is fine if the company has a moat or specific goodwill which makes it able to beat its peers.
In the Nordic market Nordea (the Nordic bank) is trading at a price to book value close to 1.0 which is okay for one of the best banks in the world (ref stress tests). Veidekke (my largest holding) and even Kopparbergs are still trading at a good/fair price. There are other companies worth mentioning, but I’m starting to feel my hangover, so I’ll leave it like this.