When I set out to create A+ Investor almost two years ago, it wasn’t merely to build a set of tools. For nearly 23 years now, I have embraced AAII’s mission of investor education and I wanted that to filter through to A+ Investor as well.
After launching A+ Investor, I started thinking about ways to engage and challenge our users. The purpose is twofold: to get you try out the many tools and features of A+ Investor and to help me better understand how you are using the tools and how you go about picking investments and managing them. I also plan to share the feedback with all of our users to perhaps provide them with insights and suggestions that will help them on their journey to becoming an A+ Investor.
So, this week marks the first of our “Investor Challenges.” The plan is to introduce a new challenge every couple of weeks to give you time to complete them and send us your results.
Given the recent turmoil in the stock market, many stocks are trading at a discount to where they were just a couple of weeks ago. As a devout value investor—and someone who stays fully invested throughout the market cycle—I have been looking for good-quality stocks trading at low price valuations.
This week I am challenging A+ Investor users to use the A+ Stock Grades Screener to identify one high-value stock that they would consider tracking and share your investment thesis about that stock with us (as well as the filters you used to arrive at that particular stock).
A value stock is a stock that trades at a lower price relative to its fundamentals, such as dividends, earnings or sales, making it appealing to value investors. In the context of the A+ Stock Grades, a stock with a low price multiple will have a high Value grade.
The A+ Stock Grades system is a grading tool based on percentile rankings of multiple key metrics within five investment factors: Value, Growth, Momentum, EPS Estimate Revisions and Quality. They represent a summary of a company’s fundamentals and give you a quick overview of how a stock rates based on the five investment factors that have been shown to produce market-beating results.
The A+ Stock Grades Screener helps you to identify stocks with particular letter grades (from A–F) across the A+ ratings on value, growth, momentum, estimate revisions and quality factors.
To give you a glimpse into my thought process when evaluating stocks, I will walk you through my steps for this week’s challenge. The analysis and comments here are my own and are not intended to be any recommendation to buy a particular stock.
Last Wednesday, I ran Stock Grades Screener filters that looked for the following characteristics:
Out of the universe of more than 6,000 stocks, I ended up with 78 candidates:
There was a significant amount of sector concentration among this group. The passing stocks were concentrated in five sectors:
In all, five sectors accounted for more than 83% of the stocks that met my Stock Grades filters.
I skipped over companies in the energy and financial sectors, namely because of the recent turmoil in the oil market and the potential impact of lower interest rates in the coming quarters.
This left me with 52 stocks, from which I uncovered REV Group Inc. (REVG). As of the close on March 10, REV Group had the following A+ Stock Grades:
REV Group designs, manufactures and distributes specialty vehicles and related aftermarket parts and services. The company operates through three segments: fire & emergency (40% of fiscal-2018 net sales), commercial (26%) and recreation (34%).
REV Group provides customized vehicle solutions for applications, including essential needs (ambulances, fire apparatus, school buses, mobility vans and municipal transit buses), industrial and commercial (terminal trucks, cut-away buses and street sweepers) and consumer leisure (RVs and luxury buses). The company is based in Wisconsin.
REV Group ranks #1 in North American ambulance unit volume, #2 in North American fire apparatus unit volume for custom chassis and #2 in small- and medium-size commercial bus volume.
REV Group rated very high in Value and high in Quality but had average grades for Growth and EPS Estimate Revisions. Since I was looking for stocks with poor momentum scores, it is not surprising that REV Group shares graded at D for that factor.
Since value is the cornerstone of my selection process, I can use the Grades page of the Stock Evaluator to take a closer look at the underlying variables that contribute to the overall Value Grade:
The A+ Value Grade is based on three valuation multiples: price to sales, price to cash flow and price to book value. It takes the average of the percentile ranks for each of these variables, (cheapest 9% for price to sales, cheapest 22% for price to cash flow and cheapest 27% for price to book value), which for REV Group was 19 as of the close on March 10.
It is worth noting that the company does not currently have a valid price-earnings ratio, because its trailing 12-month GAAP earnings per share is negative. This stems, in part, from impairment and restructuring charges the company has booked over the last several quarters as well as a recent increase in health care costs as the company hires new plant workers to staff the expansion of its largest plant (both of which would require further investigation on my part before deciding whether to add the stock to my portfolio).
The company reported a 24.5% positive earnings surprise on March 4, although the dispersion in estimates was rather high. Following the announcement, the company saw its consensus estimate for the current fiscal quarter fall by 6.0% on five downward revisions and one upward revision. However, the estimate for the next fiscal quarter has risen 2.7% (four upward revisions and two downward revisions), and the consensus estimate for the current fiscal year has also increased by the same amount (five upward revisions and two downward revisions). [This data is available on the Snapshot tab of the Stock Evaluator.]
REV Group shares have seen their share of weakness over the last year, falling nearly 36%. Just in the last four weeks the stock is down almost 33%, reaching a new all-time low.
While there does appear to be some near-term headwinds that Rev Group is facing in terms of demand within the recreation segment and rising labor costs, its attractive valuations and industry-leading or near-leading standing across multiple segments seems to offer a margin of safety that makes the company worth a closer look.
Take some time to use the A+ Stock Grades Screener to uncover a potential value Cinderella story. Pass along your analysis to aplus@aaii.com under the subject line Value Stock. I look forward to reading your analysis and highlighting your submissions in a couple of weeks.
