One of the things I want people to figure out is just how versatile a tool Portfolio Grader can be. I prefer owning stocks that have great fundamentals and are in the quantitative sweet spot. Other factors do not enter into the equation as long as the stock has the factors my research has taught me to seek.
However, I understand other investors feel more comfortable with including more traditional factors — such as high dividends or a low price-to-earnings ratio — in the stock selection process.
While research has shown that these measures might improve returns, the sample size is usually too high for an individual to benefit directly. The fact that the bottom 10% of stocks ranked by P/E ratio broadly outperforms the market doesn’t mean much if you don’t have the capital to buy the entire 10% at once … and most of us don’t have the hundreds of billions of dollars that would require.
So if you’re left to just pick a few stocks, you run the risk of buying companies that might not contribute positively to that average outperformance.
But we can use Portfolio Grader to find those stocks with low valuations that have the best fundamentals and prospects.
I looked at stocks in the S&P 500 that trade for a P/E ratio of 10 or less. Many of these are companies that are struggling right now, and the fundamentals are just awful. But there are several with great fundamentals that simply are not yet reflected in the stock price. These might make great candidates for investors truly concerned about valuations:
WellPoint (WLP) is a great example of this type of stock. The health management company operates networks of both HMOs and PPOs, and business is pretty good. Both costs and medical losses have been down the past couple of quarters, and that is boosting the bottom line. The passage of Obamacare gives a lot more focus to the managed care industry, and investors are starting to see the potential for strong growth.
WLP stock — which has a P/E right around 10 — was upgraded back in May and remains an “A”, or “strong buy,” even as it hits new multiyear highs.
First Solar (FSLR) has long been the stock everyone loves to hate. FSLR shares are off 80% in the past five years, and earlier this year, the company lost value when it said it might not book certain revenues in the second half of 2013. However, First Solar reversed course when the solar manufacturer changed its tune and announced it would be able to secure the business after all. First Solar has one of the strongest balance sheets in the solar module business, and this gives it a significant advantage over weaker competitors. Solar is here to stay, and will keep growing for decades as we search of alternatives to carbon energy sources.
Back in May, Portfolio Grader noticed that the fundamentals were improving quickly and upgraded the stock to an “A.” At a P/E of 9.5, FSLR remains a “strong buy.”
Louis Navellier is the editor of Blue Chip Growth.