David Roeder reports on real estate at 6:22 PM. Every Thursday on News- radio 780 and 105.9 FM WBBM. The reports are repeated at 10:22 p.m. Thursday and 7:22 a.m. Sunday
Updated: June 11, 2012 9:30AM
A respected financial newsletter has an encouraging message for stock investors rattled by the market’s correction: a lot of quality stocks are undervalued.
And that’s not an opinion that the newsletter Investment Quality Trends arrives at lightly. Published since 1946, the Carlsbad, Calif.-based newsletter has stuck with a strategy of evaluating the world of dividend-paying stocks, because dividends can produce clues about prices.
The newsletter has narrowed the field to what it calls “select blue chips,” stocks that must meet certain criteria that indicate a record of steady dividends payments and earnings improvement. Of the more than 7,000 stocks that are publicly traded, 254 make this list.
Markets go through boom and bust cycles, and for these “select blue chips,” that means their dividend yields fluctuate in a range. Analyze the record, and it’s possible to see when the yield signals that the stock is overpriced or underpriced.
IQT, as the newsletter calls itself, has reported market-topping returns using this technique, with the best relative performance coming in flat or down markets.
In its latest issue, the publication lists 35 stocks it follows, or 13.8 percent of the total, as being overvalued. Seventy-five stocks, or 29.5 percent, are undervalued, in its estimation. Of the rest, most are in a positive price cycle.
The percentage of overvalued stocks is well below long-term averages
Newsletter editor Kelley Wright said that having 80 percent undervalued stocks historically coincides with market bottoms, and 17 percent undervalued traditionally shows a market top.
We’re not near either extreme, but the preponderance of long-term values out there is the key.
Stocks the newsletter singles out as compelling buys covers a long list of well-known names that are paying attractive yields, especially with bank interest rates so low. Examples include Bank of Montreal (BMO), with a yield of 5.1 percent, and Lockheed Martin (LMT) at 4.9 percent. Most of these blue-chip yields range from 2 percent to 4 percent.
The newsletter also has a list it calls the Timely Ten that helps investors build their own portfolios of undervalued stocks. Included in this group are names such as Chevron (CVX), Coca Cola (KO), Union Pacific (UNP) and Procter & Gamble (PG).
More information about the newsletter is at iqtrends.com.
ANALYST VS. ANALYST: What we have at Chicago-based Morningstar is a difference of opinion over the merits of Facebook (FB).
Morningstar’s Erik Kobayashi-Solomon went through the options data showing that investors are nervous about the valuation, then noted that fellow analyst Rick Summer has a “fair value” estimate of $32 on the stock. Kobayashi-Solomon concluded that “unless Facebook were to fall a good bit lower or rise spectacularly, we do not believe the stock would make a good investment at the present time.”
His editorial “we” apparently doesn’t include Summer, who said Facebook is “poised for massive growth.” Upon the IPO on May 18, Summer posted a piece that said he expects the stock to trade above his $32 estimate, “though the focus on short-run challenges might lead to stock price declines and ultimately create a very interesting buying opportunity for the shares at a later date.” FB finished Friday at $27.10.
MESS AT MORGAN: For an enforcement action that might make even a big investment bank quake, consider last week’s penalties levied against Morgan Stanley (MS) for unlawful trading allegedly conducted at the Chicago Mercantile Exchange and the Chicago Board of Trade.
For reporting business that investigators found to be fictitious sales, the Commodity Futures Trading Commission levied a $5 million fine. The Merc and Board of Trade, owned by CME Group (CME), levied their own fines totaling $1.75 million.
The problem dealt with off-exchange trading of futures positions for cash or over-the-counter contracts. The deals must be reported to an exchange. Regulators in Morgan’s case found some of this trading was bogus and led to false pricing being reported. It’s awfully esoteric, but a mortal sin in the futures markets.
MID-CAP PICKS: In the wake of last week’s column about William Blair & Co. research showing the attractiveness of mid-cap stocks, I received some stock picks from Rob Lanphier and David Ricci, co-managers of Blair’s Mid Cap Growth Fund (WCGNX). They like Fastenal (FAST), Stericyle (SRCL) and Mead Johnson Nutrition (MJN).