In my view, none of the "Dogs" stocks are well-priced at the moment -- generally-speaking, they wouldn't pass even my initial stock screen.
This does bring up the point of: "What counts as well-priced?" For the benefit of some of the newer or less experienced forum readers, I thought I'd take a few minutes and describe what I mean. Space and time do not allow me to render this post entirely comprehensive; for that purpose, there are plenty of good discussions elsewhere on the internet and in printed form. In particular, I commend, to your attention, "The Intelligent Investor", 2nd ed., by Ben Graham.
For illustrative purposes, I'll present some of the key statistics that I employ for my initial stock screens. My stock selection process is iterative -- I widdle-down the entire market in steps, iteratively employing more stringent criteria.
The following data are from
Reuters.
Code:
Symbol P/Book(mrq) P/TangBook(mrq) Debt/Equity(mrq) CurrentRatio(mrq) NetProfitMargin(5yr) RoE(5yr)
T 1.66 n/a 72.98 0.78 10.74% 10.66%
VZ 2.18 n/a 145.45 0.81 7.08 13.72
DD 4.11 10.40 144.76 1.61 8.11 24.77
KFT 1.60 n/a 82.49 1.08 7.09 8.96
MRK 3.36 5.34 39.60 3.70 22.46 29.46
CVX 1.70 1.80 11.63 1.40 8.22 27.55
MCD 5.11 6.25 84.02 1.02 13.70 19.75
PFE 2.22 5.20 59.49 3.08 19.01 13.83
HD 2.54 2.70 53.79 1.28 5.94 19.69
When I look at the Dogs table, above, I see a set of companies which has generally performed very well over a long period of time; the management has done a good job of turning income into return for investors, often with good profit margins. However, many of these companies are carrying an enormous amount of debt. Furthermore, these companies aren't trading anywhere near their book values (which is one of the strongest indicators of overpricedness in my opinion).
Of the common valuation metrics, I should point out that I put very little credence on the popular Price/Earnings and Price/Sales ratios, preferring instead to focus largely on Price/Book (in particular, price-to-tangible-book), debt and cash flow, current ratio, profit margin, and Return on Equity (ROE) during my initial stock screens. Ultimately, I *do* look at pretty much everything, but I find these criteria to be quite decent for weeding out questionable companies early on.
For my initial stock screening, I usually employ a set of modified "Graham Criteria", such as:
Code:
- P/B > 0.3 and P/B < 1.2
- ROE >= 8% continuously for several years
- Revenue > $100M/yr
- Net profit margin >= 5% continuously for several years
- Debt/equity <= 0.5, and preferrably Current Ratio >= 1.5
I like to look at a stock which has performed very well historically -- I want to see high profit margins and good ROE over a period of about 8-10 years. (I generally allow for 1 or 2 years of less-than-desirable returns out of every 10 years, to account for turn-around situations.)
A very important difference with my approach is that, when I compute book value (and look at assets on the balance sheet), I deduct the value of all goodwill -- effectively, I consider goodwill to be worth $0. In my experience, goodwill is often carried on the books at a higher value than it should be; with only a few exceptions, I give little credence to the strength of patents or brand names, which, being intangibles, are not guaranteed money-makers, and can often decrease in value during both recessions and booms. So, because I don't like surprise asset impairment charges, I discount goodwill before I become an owner in the company.
Consider, for example, the following data:
Code:
Symbol Total Assets Goodwill Goodwill/Assets Ratio
T $266.5B $71.27B 26.7%
VZ $226.4B $22.19B 9.8%
DD $36.2B $2.1B 5.8%
KFT $66.9B $28.6B 42.7%
MRK $48.7B $1.4B 2.9%
CVX $162.5B $4.6B 2.8%
MCD $30.0B $2.4B 8.0%
PFE $141.3B $21.8B 15.4%
HD $43.0B $1.1B 2.5%
While not entirely accurate, an approximate way of thinking about this table is that the goodwill/assets ratio represents the portion of company's valuation owing primarily to its "brand name". (I prefer to invest in companies that succeed because of what they make, not what they call themselves.)
regards,
K.