I sat down this morning with the sparkling new edition of Value Line and began my regular search for value in the pages of my favorite research publication. Although it is a momentum based service, there are many ways to use the data every week beyond the ranking system, which makes it an invaluable tool for value investors.
This week, the Median Appreciation Estimate for the universe over the next five years is again just 30%. Dan Seiver of Cal Poly's Orfalea College of Business did a nice study in this as an indicator and found that the time to buy stocks is when this indicator is over 100. When it falls below 55, investors should start trimming their holdings. It is not a precise timing measure by any stretch of the imagination but it is yet another indication that this market is somewhat stretched and more than fully valued. It is a very bright caution light.
One of the first places I go each week is the best and worst performing stocks. It is gratifying to see that several of my "don't touch" stocks, including Lululemon (LULU), Tesla (TSLA) and Ulta Salon (ULTA) are on the 13-week worst performing list. Sometimes the best way to make money is not to lose it in overvalued momentum stocks. I also note some companies that I know and wouldn't mind owning if they were cheap enough (such as IO Geophysical (IO) and EZCorp (EZPW) got whacked in the quarter, so I need to go back and review their valuations.
I next turn to the stocks trading at a discount from book value list. I note that in the cheapest 20 or so stocks nothing new has fallen dramatically to create and extreme value below 70% of book value that I have not already reviewed and that in fact I already own most of them. I see that Atlantic Power, which is also on the worst performers on the list, is trading at just 64% of book value. I am intrigued by the power generation company and have suggested it as a long shot before but I think they will have to cut the dividend again and that might make it more attractive as a classic value holding. If you use this list to look for stocks keep in mind that Value line reports stated book value so you have to run the numbers and take out intangible assets to get the real number.
When I look through the list of stocks with the highest three-to-five-year appreciation I see that Penn National Gaming (PENN) is the second highest ranked stock with anticipated gains of almost 400%.The stock trade's a bit too high on tangible book value for my taste but as a long shot pick I am intrigued and make a note to do a little more work on this one. The company spun off its real estate assets late last year and I want to take a look at both parts of the deal to see if either of them is cheap enough to warrant investment.
The highest ranked stock is IO Geophysical, which I have owned in the past. This provider of seismic data to the oil and gas industry badly missed expectations in the third quarter and the stock price has fallen off sharply. It is not a classic asset value stock but has the making of a fantastic turnaround stock. The company has invested in several new investments and acquired new databases that should attract attention when exploration and production activity increases over the next few years. We should see stronger demand in the second half of this year as shale demand increases and activity in the Gulf of Mexico increases. According to the research service, the shares could rise by almost 400% over the next three to five years.
Kicking over the rocks in this week's edition did not turn up a lot of new ideas but it did reinforce my conviction in several of my holdings and my overall concern about the current market conditions. The median appreciation index is very low and there are just not a lot of new ideas to be found.