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First Cut Stocks Value Investing

Value Stocks With Upward Estimate Revisions

These 16 stocks are profitable, have low price-earnings ratios and have rising earnings estimates.

by John Bajkowski | September 2016

Peter Berezin highlights a range of company characteristics that are linked to outperforming the market. Notably, Berezin shows that value stocks have outperformed growth stocks in the United States as well as abroad. Whether book value, earnings, cash or dividends are used to measure value, value stocks tend to outperform growth stock over the long term.

For this First Cut we examine some the key elements highlighted in the article “Why Value Beats Growth: A Brief Explanation” in this issue.

The price-earnings ratio (P/E), or earnings multiple, is one of the most popular measures of company value. Value investors analyze companies with low price-earnings ratios, hoping to find stocks mispriced because of market neglect, overreaction to news and reaction to unrealistic expectations. The first filter looks for domestic exchange-listed companies with a price-earnings ratio among the lowest third of all companies. AAII’s Stock Investor Pro fundamental stock screening and research database was used to perform the screen.

The market is forward-looking and security prices are established through expectations. Prices change as these expectations change or are proven incorrect. Berezin notes that stocks with recent upgrades tend to outperform the market, especially if analysts have previously been bearish about the firm. The next filters look for companies with earnings estimates that have been raised over the last three months for both the current fiscal quarter and the current fiscal year.

Stocks with a wide dispersion of earnings estimates tend to underperform, so the First Cut looks for stocks with relative standard deviation (standard deviation divided by the mean estimate) less than the 8.3% median that all companies currently exhibit.

Investors typically overpay for turnarounds, distressed companies or financially risky companies. To guard against this, the First Cut required positive expected earnings for the current year, positive free cash flow and a ratio of total liabilities to total assets below the sector median.

Sixteen companies made the First Cut, and they are ranked by their price-earnings ratio in the table below. The historical earnings growth rate is presented to highlight past success. The market cap helps to illustrate company size: Berezin notes that research indicates that small-cap companies have outperformed large-cap companies. The 52-week relative strength rank highlights the performance of these stocks relative to all companies.

—John Bajkowski, president of AAII

Value Stocks With Upward Estimate Revisions Ranked by Price-Earnings Ratio

P/E Ratio (X)

Qtrly EPS Est ($/Sh)

Rel Std Dev (%)

EPS Est Rev 3 Mos (%)		 Total Liab to Total Assets

5-Yr Ann’l EPS Grth (%)

Mkt Cap ($ Mil)

52-Wk Rel Strgth Rank (%)

Share Price (8/15) ($)		 Industry
Company (Ticker) Firm (%) Sector (%)
Advanced Energy Ind. (AEIS) 4.9 0.75 2.3 22.7 36.3 50.2 10.7 1,654 93 41.87 Electronic Instru & Controls
Wabash National Corp. (WNC) 7.1 0.48 7.5 14.6 51.1 57.8 19.6 846 60 13.63 Auto & Truck Manufacturers
AFLAC Inc. (AFL) 11.9 1.74 1.8 5.1 84.0 86.7 3.5 29,772 74 72.68 Insurance (Accident & Health)
PVH Corp. (PVH) 12.6 1.29 1.6 6.4 55.3 57.8 53.5 8,409 40 105.05 Apparel/Accessories
Corning Inc. (GLW) 12.7 0.38 2.3 1.3 36.0 63.1 (15.0) 23,713 86 23.07 Personal & Household Products
Hibbett Sports, Inc. (HIBB) 12.8 0.27 4.8 0.7 26.6 64.5 12.8 860 43 38.88 Retail (Specialty Non-Apparel)
Innospec Inc. (IOSP) 12.7 0.77 6.8 2.0 38.0 57.2 10.3 1,413 86 59.35 Chemical Manufacturing
Credit Acceptance Corp. (CACC) 13.5 4.14 3.5 3.5 73.2 86.7 20.3 4,063 48 203.45 Consumer Financial Services
American River Bankshares (AMRB) 13.3 0.20 3.1 2.1 86.6 86.7 70.5 69 62 10.31 Regional Banks
First Financial Corp. (THFF) 13.6 0.66 0.9 3.1 86.0 86.7 1.9 495 82 40.53 Regional Banks
Skyworks Solutions Inc. (SWKS) 13.8 1.43 0.6 1.0 11.2 50.2 40.4 12,662 29 69.50 Semiconductors
Torchmark Corp. (TMK) 14.2 1.12 1.2 0.3 77.4 86.7 8.3 7,318 49 62.21 Insurance (Life)
Citizens Financial Group (CFG) 14.0 0.48 5.0 3.4 86.1 86.7 NA 12,088 38 23.54 Regional Banks
Murphy USA Inc. (MUSA) 14.0 1.66 7.0 11.8 63.6 64.5 0.6 2,956 92 74.98 Retail (Specialty Non-Apparel)
First American Financial (FAF) 14.6 0.88 5.9 8.6 66.7 86.7 16.9 4,491 48 41.16 Insurance (Property & Casualty)
Great Western Bancorp (GWB) 15.2 0.60 2.7 1.2 85.7 86.7 NA 1,929 83 32.84 Regional Banks
Median For All Stocks 20.0 — 8.3 (1.6) 62.3 — 5.9 288 50 —
Source: AAII’s Stock Investor Pro, Thomson Reuters, and I/B/E/S. Data as of 8/15/2016.

 

Criteria for Stock Investor Pro Users

  Field: Operator: Factor: Compare to:
  Exchange Not Equal   Over the counter
And Country Contains   United States
And ADR/ADS Stock Is False    
And % Rank-PE <=   33
And EPS Est Q0 >   EPS Est Q0-3 Months Ago
And Rel Std Dev <   8.26
And EPS Est Y0 >   0
And EPS Est Y0 >   EPS Est Y0-3 Months Ago
And Free cash flow/share 12m >   0
And Total liabilities/assets Q1 <   Sector Total liabilities/assets Q1
Custom Field
Rel Std Dev ABS(([EPS Est Q0-Std. dev.]/[EPS Est Q0])*100)

Discussion

Buel Barnett from CA posted over 9 years ago:

What is the significance of " standard deviation " in stock comparison ?


Joe Silverman from CA posted over 9 years ago:

Do any of these pay dividends and, if so, what?


Andrew Helseth from FL posted over 9 years ago:

In answer to Barnett's question on the significance of "standard deviation" (SD%): In any given set of earning estimates for a specific point in time, the lower the SD% of those estimates, the more consistent the variation of the estimate figures from their arithmetic mean (average), and the closer that future estimates will likely be to an extension of the present arithmetic mean within its SD% limits.


Ravi Shankar from FL posted over 9 years ago:

Will this be included in stock screens? I went there today and did not see it listed. If you do not list it there, does this become our job to build up the screens from the Stock Investor Pro?


Charles Rotblut from IL posted over 9 years ago:

Ravi, The First Cut is designed to provide of idea of screening characteristics for stock investors. There is not currently a plan to add this screen to the Stock Screens on AAII.com. The criteria for creating the in Stock Investor Pro are listed above. I was able to create in just a few minutes. -Charles


Christophe Couallier from FL posted over 9 years ago:

Charles, these AAII First Cut articles are a gem. You give us ideas on stock selection and types of relevant criteria to consider. It's a concise and effective one-page actionable screen. Month after month, we can better define our own set of criteria that best fit our investment philosophy. First Cut is like investment 101 in action. I love it. Suggestion for a future First Cut: using PE$10B and minimum of 5-year consecutive positive EPS. I would be curious to see the result of your analysis on this set of criteria.


Neil from GA posted over 9 years ago:

I also wondered if the screen would be made available. I went ahead a tried to create the screen. I was able to do that watching some of the tutorial videos but it took me some time. I found that I learned much more about the program and fields while creating the screen. This screen led me to learn how to create a custom field and how to compare company results against the sector. I also had to read the field definitions in some cases which gave me more confidence knowing what the numbers represent.


Tom Courtney from CT posted over 9 years ago:

When is the sell signal? Is it when the stocks fall off this screen amd if so chances are its based on analysts opinion - won't the stock have lost significant price appreciation? This was published 5 months ago does anyone know the returns on the above portfolio?


Robert Mcnamara from FL posted over 7 years ago:

I verified this screen does rather nicely in a back test from 1/3/2009 till 7/6/2018 using SIPro historical data. I limited the number of stocks to hold to 10 by sorting on the magnitude of earnings estimate change ((ee.EPS_EQ0 - ee.EPS3M_EQ0)/psd.price). This gave a compound annual return of 22.2% trading on the first Monday close after the SIPro data was available assuming a 0.7% round trip slippage for each trade. Average hold was for two months, forcing hold to 3 months continues to work well however a 6 month hold return is less than the market. Why don't the First Cut articles include a backtest? I personally don't invest without some verification a method has at least a fighting chance.


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