There’s Value Out There

Fourth quarter earnings have been marked by mega-billion dollar charges, negative earnings for the entire Financial sector, an almost unimaginable decline (at least from the viewpoint six-months ago) of a 21% earnings decline in the fourth quarter, and an overall year-over-year 3.5% decline in EPS for the S&P 500. Not very good. And that’s before we talk about the market, a recession, housing or a growing concern over the employment numbers. On the bright side, however, not all companies are reporting negative or even lower earnings. In fact, some are continuing that 18-quarter double-digit earnings growth streak we had a while ago. While the quarter has been mostly written-off by analysts and accountants, a few simple screens revealed a different story from the headlines.

I looked at the S&P 500 and then excluded the 92 Financials, due to their current risk (and in their case it’s what’s off the books that I’m more concerned about), and for the 408 remaining issues I found over a third of the them either have reported, or are expected to report, at least a 15% fourth quarter increase in EPS. For 2008, again for the non-Financials, I found 50 issues expecting to post at least a 15% annual earnings gain, selling under a 15 2008 P/E and paying a dividend. Then I looked for an S&P Equity Research Services “Buy” recommendation and an S&P one-year price target of at least 20% over where it was selling now. The result is that half of these companies passed the two additional criteria.

To me, these companies are the starting point for investors who are looking for underlying value in companies whose stock prices may be depressed more due to the general market conditions then their own fundamentals. Caution is definitely the word here. Markets are volatile, recession is in the air, consumers are pulling back and the impact, timing and effectiveness of relief, either from the Fed or a stimulus plan, is unclear. Still, value is out there, but again, the first word is caution, followed by terms investor liquidity, time horizon, and then, and only then, underlying value.

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