Rules of the Game: Tips for Choosing Value Stocks

 | Feb 28, 2013 | 12:00 PM EST
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I spent years as a growth trader, trading coach, and even hosted a radio show that focused on small-cap growth names. But as I shifted away from the business of coaching traders and into the business of managing assets, I saw the wisdom of a balanced portfolio. To achieve most investors' objectives, it's simply not wise to throw most -- or even all -- of your money at a handful of growth stocks.

Of course, it makes sense to include growth in the mix, and that can be done using ETFs or individual stocks. But I have also put my focus on fixed income, as well as large-caps and even value stocks.

When it comes to value -- a category dyed-in-the-wool growth investors view with horror -- it can be a way to add dividend payers and steady performers to a portfolio. In one of the individual stock portfolios that we manage for clients, we hold predominantly large-caps from both the value and growth categories. There are a few top-performing mid-caps among the holdings, as well.

I track growth stocks for earnings and revenue increases, as well as recent price appreciation or moving-average support. I don't concern myself with price-to-earnings ratios for most of these growth names, except in cases where the stock appears "priced for perfection," and it may be wise to wait for a pullback.

I ran a value screen this week, hunting for companies with low P/E and price-to-book ratios. I also factored in high dividend yields. I also wanted to see companies with a track record of profitability.

A large-cap stock that landed on my screen was healthcare insurer WellPoint (WLP). The stock has a market cap of nearly $19 billion, and it moves 2.3 million shares per day, on average.

If I were looking for growth stocks, this one would not even show up on a scan due to its recent technical performance. But the earnings are expected to increase 3% this year, to $7.82 per share, and another 5% next year, to $8.18 per share. WellPoint's dividend yield is 2.4%. Dividends have been on the rise, a potentially bullish sign. Its Price-to-earnings ratio (P/E) is 8, and its price-to-book ratio is 0.82.

The criteria for analyzing a value stock are different from a growth name. Right now, with the stock hovering 0.4% below its 50-day line and 1.8% above its 200-day, you could consider this to be on sale. That's not a recommendation –- any purchases would depend on your own investment objectives, risk tolerance and other factors.

A mid-cap from my value screen is another insurer, albeit in a different kind of business: Assured Guaranty (AGO) is a Bermuda-based company that guarantees scheduled principal and interest payments on public infrastructure and municipal bonds.

This stock has a market cap of around $3.6 billion, and it trades 2.2 million shares a day. Its P/E ratio is 7 and it price-to-book is 0.76. Its dividend yield is 2.2%, and the company recently increased its dividend.

Be aware: This is not one of those stable value names that so many people buy and forget about (which is actually never a good strategy to begin with). This is a high beta stock, so it has a propensity toward volatility. As with any stock, consider your reasons for owning it before making a purchase.

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