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The current market still remains volatile and although I focus a lot on small caps, small caps are not the only stock investments that are undervalued or mispriced. The markets have risen substantially from its lows but there are still bargains to be had by investing in stocks, especially if your focus is on buying for the long term.
Late last year, Forbes released their platinum 400 best big companies and 200 best small companies which is a fantastic source of finding undervalued investments. Take for example the following companies which we reviewed and estimated on Dec 11, 2008.
Blue Nile (NILE)
- Price on Dec 11: $27.84
- Estimated fair value: $32
- Current stock price: $39.04
Jos. A. Bank Clothiers (JOSB)
- Price on Dec 11: $26.15
- Estimated fair value: $44
- Current stock price: $40.95
- Price on Dec 11: $4.39
- Estimated fair value: $15
- Current stock price: $14.18
FactSet Research Systems (FDS)
- Price on Dec 11: $38.36
- Estimated fair value: $44
- Current stock price: $52.22
These are small to mid cap size companies so the stock price difference is to be expected, but todays market also has created many of the same opportunities within the large cap universe.
Forbes Best Big 400 Stock Investment Screen
- Immediately exclude financials (don’t understand or know how to value them)
- Run the companies through the investment spreadsheet with the PE as the growth rate, but capped at 15% except for some special cases. The selected companies shall exhibit;
- Positive, consistent and growing cash flows.
- Consistent margins. Fluctuating/decreasing margins over several years will not be accepted unless the other criterias are outstanding.
- Above average returns from capital investments (CROIC, ROE, ROA)
- Strong balance sheet
- Companies should have at least 5 years of operating history
- The companies that make the cut will have to be reviewed individually
As I was going through each of the first 25 companies, I noticed there were many capital intensive companies with high debt loads. This is because Forbes ranked the companies based on ROE where having a high debt load can play a significant role.
Also, the spreads between the current stock price and estimated price were much smaller as a percentage as these companies are heavily followed and more likely to trade closer to its fair value.
Potential Stock Ideas
Going through the first 25 businesses has produced 7 stock investment candidates for further analysis. They are:
- Apple (AAPL)
- Great company and huge cash flow generator. Cult following in both retail and stock market.
- Estimated fair value: $160
- Hug Group Inc (HUBG)
- Consistent margins, reduced debt, increased FCF/debt. Bottom line margins have not dropped too much.
- Estimated fair value: $25-$43
- Monsanto (MON)
- Strong profits in recession, increased margins significantly, metrics are up.
- Estimated fair value: $100
- Cliffs Natural Resources (CLF)
- Mining and natural resources is cyclical. FCF +ve past several years and margins increased. Good margin of safety but unpredictable. Cheap price could factor in the unpredictability.
- Estimated fair value: $53-$60
- Google (GOOG)
- Great company constantly innovating. Incredible numbers. Another cult..
- Estimated fair value: $390-600 (Difficult to tell with GOOG)
- Occidental Petroleum Corp (OXY)
- Oil company but FCF +ve for past 10 years, numbers and margins are excellent for this company.
- Estimated fair value: $87
- Nucor (NUE)
- Excellent company and numbers but big drop in margins last year.
- Estimated fair value: $60
Fair Value Calculations with Free Investment Tools
To calculate the fair value of stocks for yourself, you can download the free DCF investing spreadsheet, Ben Graham investment spreadsheet or get the best premium investing spreadsheet with many more features.
Full List of First 25 Companies and Fair Value Estimates
Download the first 25 best big companies to invest in.
No positions in any stocks mentioned
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