The bull market keeps trotting forward, as does conjecture about how long it will last and what has the potential to cause the next downturn. While it is unpopular to say anything negative about positive performance, it's especially important for investors to maintain perspective when everything in the market looks good and media hype abounds.
The truth about this market recently is that the lion's share of gains is attributable to a precious few stocks, which can only mean that most other stocks are not performing nearly as well. But this is precisely the landscape in which the fundamental, patient investor can find opportunities.
According to BofA Merrill Lynch data, FANG stocks (an acronym created by Jim Cramer in 2015 to represent the popular tech stocks Facebook (FB) , Amazon (AMZN) , Netflix (NFLX) and Google (GOOGL) ) are up 30% year-to-date vs. the S&P 500's 8% gain. In a recent CNBC interview, Wunderlich Securities chief market strategist Art Hogan said, "The good news is that the market is at an all-time high. The bad news is it happened on the back of a few tech stocks."
It stands to reason that if the majority of stocks in the market are not participating in the up move, investors can find value if they do their homework and identify solid, reasonably priced companies with solid long-term prospects. But a value-investing approach is a good one regardless of the weighting of market returns -- and one that has been used by some of the most-successful investors. Warren Buffett, arguably the greatest investor of all time, has amassed a fortune using precisely this strategy. He isn't interested in speculation or hype about a stock or whether it will go up or down on any given day. Buffett focuses on a company's underlying business and its long-term prospects.
Panelists at a recent Morningstar session on value investing support the approach, according to a recent article in Financial Advisor, despite the fact that value has underperformed growth stocks over the past decade. The article quotes Ronen Israel of AQR Capital Management: "Value as a strategy, long term, is a good strategy. But it doesn't make money all the time. It's not unusual to have a period of underperformance like what we've just seen."
At a 2008 press conference, Buffett noted, "It doesn't make any difference what other people think of a stock. What matters is whether you know enough to evaluate the business." Finding value in a top-heavy market, or any market for that matter, requires an investor to focus on underlying fundamentals and be willing to wait it out through down periods.
I have developed stock-screening models based on the investing strategies of Warren Buffett and other market gurus who use concrete metrics related to companies' underlying operations and stock valuations. Using these models, which incorporate these fundamentals into a systematic and disciplined investment system, I have identified the following five high-scoring value-like stocks:
Accenture (ACN) provides management and technology services to clients in various industries and geographic regions, including North America and Europe. The company is favored by our Warren Buffett-based investment strategy as a result of its earnings predictability and long-term historical EPS growth of 12.3% (based on 3, 4 and 5-year averages).
The company can pay off debt with earnings in less than two years, a plus under this model, and management's use of retained earnings reflects a return of 17.5%. Our James O'Shaughnessy-inspired screening model likes the company's size (market cap of $81.07 billion) and cash flow-per-share of $7.38, which is well above the market mean ($1.74).
Factset Research Systems (FDS) is engaged in providing integrated financial information and big-data analytical applications for the global investment community. Under our Buffett-based investment methodology, the company is favored for its 10-year average return on equity of 32.5% -- more than double the required minimum of 15%. Free-cash-flow-per-share of $5.06 indicates that the company is generating more cash than it is spending, a plus under this model, and management's use of retained earnings reflects a return of 19.6%. Predictable earnings and 10-year average growth in earnings-per-share of 17.4% add appeal.
Tractor Supply Company (TSCO) operates rural lifestyle retail stores in the U.S., focusing on recreational farmers and ranchers as well as tradesmen and small businesses. The company earns high marks from our Buffett-based screen for its 10-year average EPS growth of 14.4% as well as its ability to pay off debt with earnings in less than two years. Average return-on-equity over the past 10 years of 22.6% well exceeds the minimum requirement of 15%, and management's use of retained earnings reflects a favorable return of 18.3%. Buffett also likes to see a decrease in shares outstanding, as it indicates that management is using excess capital to increase shareholder value. The company's shares outstanding have fallen over the past five years from 139 million to 131 million shares, a plus under this model.
Hibbett Sports (HIBB) operates athletic specialty stores in small and mid-sized markets across the U.S. The company earns a perfect score under our Benjamin Graham-inspired stock screening model due to its revenue base of $966.6 million (based on 12-month trailing sales) and liquidity (current ratio of 3.58 versus the minimum requirement of 2.0). This screen requires a company's long-term debt to be less than its net current assets. With debt totaling $2.9 million and net current assets of $244.3 million, the company passes this test with flying colors. Our Kenneth Fisher-based stock screen also gives a thumb's up to the company due to its price-to-sales ratio of 0.52 -- this model considers anything under 0.75 to be quite attractive. Total debt-to-equity of 0.18% adds appeal.
Allegiant Travel Company (ALGT) is a leisure travel company that scores highly under our Buffett-based screen due to its earnings predictability and long-term growth in earnings-per-share (based on three, four and five-year averages) of 37.5%. 10-year average ROE of 25.2% is considered excellent compared to the minimum requirement of 15%, and free-cash-flow-per-share of $4.83 adds interest. Management's use of retained earnings reflects a favorable return of 23.1%.