How to find values in a bull market

Start with a stock screener

The consensus is that the U.S. market is over-valued and ready for a drop. I agree with half of that. The market is fairly valued and even under-valued when you consider forward earnings into 2015 and beyond. Yet I do think we’re ready for a drop in the market.

So how do you find value now?

START WITH A STOCK SCREENER

There’re many stock screeners on the Internet. Most are free. The best one I’ve found is at FinViz.com. It has a very in-depth stock filter that covers both technical and fundamental measures.

The initial “universe” FinViz started with contained 6,755 different stocks. I then eliminated stocks yielding less than 3 percent per year. Then I excluded international companies, companies under $2 billion in value and P/E ratios over 15 currently and going forward. The result was a short list of 37 stocks with these attributes:

  •     Cheaper than the U.S. market
  •     Dividend income over 3 percent (a 30-year T-bond pays 3.18 percent annually) and
  •     Healthy size (avoiding smaller, more-volatile stocks)

WHAT THE SCREENER FOUND

The list was dominated by financials, including asset managers, banks, an insurance company, mortgage company and several private equity businesses.

I think the asset management/private equity companies are a unique play on the “super-bull” market we’re in. As the markets experience a long-term rise, these managers should increase assets, revenue and earnings. Then the stock price could have an up swing, too. Here are a few of them: AllianceBernstein ($25.73, symbol: AB), Apollo Investment ($8.64, AINV), Blackstone Group ($33.11, BX), Fortress Investment ($7.49, FIG) and Prospect Capital ($10.85, PSEC) among others.

EVERYTHING PLUS THE KITCHEN SINK

Besides financials there was telecom like AT&T ($34.74, T) and Verizon ($48.74, VZ). Both have high yields, 5.3 and 4.3 percent, respectively. Both also have their hands in new technologies like LTE. Another group was oil and oil services. There were companies like ConocoPhillips ($79.17, COP), CVR Refining ($24.32, CVRR), Chevron ($125.94, CVX) and Northern Tier Energy ($25.42, NTI).

“THE OTHER BERKSHIRE HATHAWAY”

I have a real fondness for conglomerates. I think they’re very underrated companies that have hidden synergies that help them through tough economic times. For example, as one unit is floundering another could be growing and giving strength and support to the others. The most famous conglomerate is Warren Buffett’s Berkshire Hathaway. We can see, from his success, that this strategy is a great way to build wealth.

The stock screener resulted in one such company, Icahn Enterprises ($109.15, IEP). It has nine major segments ranging from automotive to casino gaming to real estate. It’s a nice proxy for the U.S. economy. And it pays a very healthy 5.6 percent dividend yield.

These are most of the industries the screener brought up. Try your own ideas at this or other websites. Remember that these are just ideas. There’s risk of loss with most investments. This article is meant as a starting point for your continued research.

Categories: Finance