5 Stocks to Profit from the Favorite Indicators of 3 Investing Legends
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It is wise to follow the advice of investing legends.
Jack Bogle, founder of the Vanguard Mutual Fund Group, paid particular attention to dividend income. Sir John Templeton, selected in 1999 by Money magazine as "arguably the greatest stock picker of the century," favored stocks that had low price-to-earnings ratios. Peter Lynch, who guided the Fidelity Magellan fund to annualized returns of 29.2% from 1977 to 1990, views the price-to-earnings growth (PEG) ratio as one of the most important financial indicators for future gains.
At present, the average dividend yield for a member of the Standard & Poor's 500 Index is around 2%. The mean price-to-earnings ratio for a Standard & Poor's company is now 17.4. A PEG of 1 is considered to be adequate; with the lower the better. Vale (NYSE: VALE), Safeway Inc (NYSE: SWY), Intel Corporation (NASDAQ: INTC), CYS Investments (NYSE: CYS) and Cliff's Natural Resources (NYSE: CLF) offer to long term investors what these three investing legends favor in those critical indicators and much, much more.
When a publicly traded company has valuations such as those, it is generally in disfavor with the market. That is exactly how Sir John Templeton prospered. During The Great Depression, he purchased 100 shares of the 104 stocks on the New York Stock Exchange that were selling for less than $1 (about $17 each in today's value). He profited greatly when the United States economy recovered as a result of World War II.
As Baron von Rothschild said about investing such as that, "When the streets of Paris run with blood, I buy!"
The chart below clearly shows that each of these companies except CYS Investments has been hemorrhaging market capitalization in recent trading.
Just as there are many factors contributing to the decline in the share price of each except for CYS Investments, there are many reasons why investors should be bullish over the long term for all. Intel is off as it just lowered its forecast for the third quarter. According to Tim Brugger of The Motley Fool, this was done as "Intel CEO Paul Otellini and crew are content taking small hits to Intel's stock price now, just as they did last quarter. Why? Because Intel knows that when actual Q3 2012 earnings are announced Oct. 16 -- which will either exceed or be on the high-end of "expectations" -- the bounce that follows will make up for the near-term drop in share price."
This "near-term drop" in share price allows for investors with a long term outlook to buy Intel with an even more attractive valuation. The dividend yield is now 3.72%. The price-to-earnings ratio is 10.25; and the PEG is just 0.96.
Vale and Cliff's Natural Resources are both in disfavor due to the decline in global economic growth, particularly in China. Based in Brazil, Vale is an industrial minerals and metals company that prospers when China is booming. As economic growth in China is down, Vale is off by 13.81% for the year. But the takeover bid of Glencore for Xstrata with the offer being increased demonstrates the long term attractiveness of the sector. The long-term appeal of Vale is also furthered by its PEG of only 0.46%.
Cliff's Natural Resources is a coal company, which is a fossil fuel that has suffered from natural gas becoming used more due to its falling price; and the decline of economic growth in China, India, Russia and other major importers. But a recent federal court decision and the announcement of a $156 billion economic stimulus plan in China that is focused on infrastructure development had Cliff's Natural Resouces jumping 11.64% for the last week of market action.
Recently upgraded by Deutsche Bank with a new target price of $22, Safeway is selling for around $16.30. Safeway operates grocery stores, primarily on the West Coast and Mid-Atlantic region of the United States. This is a very competitive industry: the profit margin for Safeway is just 1.25%. Despite that, what makes Safeway even more attractive than just its bullish PE and PEG with a healthy dividend yield is its plans to spin off its gift card operation. In terms of value, the price-to-earnings ratio of Safeway is less than half that of competitors such as Kroger, Whole Foods and The Fresh Market.
Investments, a real estate investment trust that invests in mortgages, is unique in that it is trading near its 52-week peak; and still has such alluring valuations. Even with that price rise, the PEG is only 0.90. Downgraded on July 12, CYS Investments has increased from around $13.75 to about $14.50 since that action. CYS Investments has very appealing return-on-equity, revenue growth, double digit dividend, and profit margins. With Federal Reserve Chairman Ben Bernanke commited to a low interest rate environment until at least 2014, and most likely longer based on his speech at the Jackson Hole economic policy summit on August 29, CYS Investments should continue to rise.
In his book Enough, Jack Bogle points out that dividend income has provided about 40% of the historic total return of a stock. As the chart below shows, each of these five companies has a robust dividend yield, far above the average of around 2% for a Standard & Poor's 500 member. Moreover, the cash flow framework of each allows for dividend growth in the future.
Each of these favorite indicators of the three investing legends has a fundamental appeal for growth, dividend and value seekers. The PEG is critical for growth investing. Dividend yields are a must for those wanting income. A low price-to-earnings ratio is a very useful indicator for a stock being undervalued. In addition to these companies being very attractive for these three modes of buying stocks for the long term, three of the best investors in history favor the indicators that each has to offer. The favorite indicators of these three legends in selecting stocks makes for a very useful guide for the individual investor purchasing shares for long term gains.
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