Question

1.

You've probably heard financial analysts comment that a stock is selling for some number "times earnings," such as 30-times earnings or 12.5-times earnings. This means that P, the price the stock is currently trading at, is 30 times higher than E, the company's annual earnings per share, or EPS.. However, for now, all you need to know is that value investors like the P/E ratio to be as low as possible, preferably even in the single digits. The number that results from calculating P/E is called the earnings multiple. So a stock that sells for $50 (P) and generates $2 EPS (E) would have an earnings multiple of 50/2, or 25. A value investor would normally pass on this stock. (For more information, readInvestors Beware: There Are 5 Types Of Earnings Per Share.) Earnings Yield Earnings yield is simply the inverse of the earnings multiple.. So a stock with an earnings multiple of 5 has an earnings yield of 1/5, or 0.2, more commonly stated as 20%. Since value investors like stocks with a low earnings multiple and earnings yield is the inverse of that number, we want to see a high earnings yield. Orimarily a high earnings yield tells investors that the stock is able to generate a large amount of earnings relative to the share price. Go to the Yahoo Finaance Stock Screener at http://screener.finance.yahoo.com/stocks.html (Links to an external site.) (Links to an external site.) (Links to an external site.) This tool will allow you to search for stocks using various search criteria, including industry, PE Ratio range, Dividend yield etc. Locate three stocks that you believe are a good "VALUE" based upon your search. as a rule of thumb, you should always compare your investments to their peers within the industry. For example if you compare Ford Motor with Toyota, you will see that there is little variance between the PE ratios and the dividend yield of these two firms. If, however, Ford was yielding much more (higher dividend yield) than Toyota and other automobile manufacturers, this might indicate that Ford is a far risker investment, because a yield that varies from the industry average is a warning sign.

ASSIGNMENT: After you screen for good value stocks based upon whatever screening criteria you choose, discuss the three investments, why you think they are good values right now, and what criteria you used to screen for these stocks

Answer 1

The three stocks that I believe are good value are:

1. AT&T

2. Valero Energy Corp

3. The Travelers Companies Inc.

The screening criteria used for selecting these stocks is provided below as a screenshot of the Yahoo! Finance web-page.

Please find bellow the reasons for these selections:

1. AT&T - Price-to-Earnings ratio of AT&T is low at 10.59. The industry average is -33.17 with the negative sign indicating that the overall industry has incurred a net loss. The Dividend Yield for AT&T is quite high at 5.49%. AT&T has a good history of paying out high dividends. The industry average is near 0%. The Net Profit Margin for AT&T in the past 12 months was 9.47% while the industry incurred a net loss of 3.38%. The Return on Equity for AT&T was quite high at 13.38% compared to a negative -0.08% for the industry.

2. Valero Energy Corp - The Price-to-Earnings ratio of Valero (VLO) is 14.10 compared to the industry average of 17.65. It means that VLO is trading cheap compared to other stocks in the sector. The Dividend Yield of VLO is 4.27% compared to industry average of 1.79%. It means that VLO distributes more of its profits among the shareholders compared to other companies in this sector. The Return on Equity for VLO is 11.31% compared to the industry average of 9.75% indicating that VLO is able to utilize its equity capital much more efficiently than its competitors.

3. The Travelers Companies Inc. (TRV) - Price-to-Earnings ratio for TRV is lower compared to the industry (15.47 vs 16.53). The Dividend Yield of TRV is almost double of the industry average at 2.23% compared to 1.22%. Net Profit Margin of TRV for the Trailing 12 months is 8.65% compared to a lower 6.52% for the industry. And the return on Equity for TRV is also substantially higher at 10.73% against 7.02% for the industry.