Three Formulas for Finding Value Stocks

by Jason Jenkins

finding value stocks

Despite positive news lately, there's a lot going on in the markets right now, and it isn't good. The most terrifying aspect of all is that the doom and gloom is spread worldwide.

Europe is a mess right now. Two of its four largest economies teeter on disaster. Meanwhile, Greece is the troubled teenager who knows he needs to get his act together but continues to find himself in bad situations. Germany and France are still experiencing menial growth…

Eurozone authorities recognize there's a problem, but it may be a too little too late.

Then the United States has its own problems.

Our Central Bank has come under fire for its "quantitative easing" monetary policy, which was primarily ineffective. Its latest initiative of flattening the yield curve may prove detrimental to long-term investment. The dysfunction of Washington policymakers is well noted and, finally, there's that $14-trillion national debt thing.

Even from peaks earlier this year, Japanese markets are down over 20% due to natural disasters.

In times like these, it's wise to go bargain shopping. Good companies sometimes get dragged down along with the ebbs and flows of a volatile market. For no fault of their own, they may be undervalued.

Morningstar's Buyback List

One indication that a stock is undervalued is a company buyback. A few months ago, I wrote about Warren Buffet's buyback announcement of Berkshire Hathaway's Class A and B Shares (NYSE: BRK.ANYSE: BRK.B). In September, Berkshire Hathaway's board approved a plan to buy back the company's stock, an indication that Buffett believed the stock was undervalued.

Morningstar reported a list of other companies whose Board of Directors are likely to or have given the "okay" to buy back stock. Here is a list of four companies mentioned:

  1. CSX Corp. (NYSE: CSX)
  2. Union Pacific Corp. (NYSE: UNP)
  3. Norfolk Southern Corp. (NYSE: NSC)
  4. United Parcel Service Inc. (NYSE: UPS)

Is There a Formula for Finding These Companies?

In fact, there are several…

Morningstar reports that to find firms in the position for a possible buyback, you can look for stocks trading at their 52-week lows with low debt – this would be measured by the total debt to total equity where the lower the number, the better – and high cash balances as measured by cash-long term debt/market capitalization.

Another option for determining possible buyback opportunities, according to Michelle Swartzentruber, a research analyst with Morningstar, would be able to identify companies that have enough cash left over to do buybacks even after paying off debt.

And a third option would be to look for stocks with strong balance sheets, strong sales growth and better-than-average dividend yields.

Even when the 24/7 news cycle is reporting doom and gloom, it doesn't mean that every stock in the market is rubbish. As in any heap of rubbish, you can always find something valuable if you know where to look.

Good Investing,

Jason Jenkins

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