Friday September 21, 2012
by J. Royden Ward, editor Cabot Benjamin Graham Value Letter
Benjamin Graham has been recognized for decades as the father of value investing. Warren Buffett was a student of Graham at Columbia University and later worked for Mr. Graham for several years.
For our latest special report, I combine Warren Buffett’s and Ben Graham’s criteria for choosing stocks; here, we look at four high-quality companies that ﬁt our criteria.
To ﬁnd these Graham-Buffett style investment opportunities, I looked for stocks with:
Aﬂac (AFL) is the world’s largest supplemental cancer insurance provider, deriving 75% of its business from Japan. It provides insurance to one out of every four Japanese households.
Aﬂac has expanded its product line and added new marketing venues in recent years. Non-cancer insurance policies now account for 70 percent of new sales.
Sales increased 13% and earnings per share rose 9% during the 12 months ended 6/30/12. I forecast sales and earnings per share growth of 9% during the next 12 months.
Growth could receive an additional boost if U.S. sales improve noticeably. AFL shares sell at 7.5 times latest EPS, which is well below the 10-year average P/E of 10.6. The 2.7% dividend yield adds signiﬁcant value.
Established in 1850, American Express (AXP) is a leading global payments and travel services company.
Sales and earnings declined in 2008 and 2009, but rebounded to record levels in 2011. The company’s strong balance sheet and low customer defaults helped it weather the recent recession.
I forecast sales growth of 7% and EPS growth of 12% during the next 12 months, similar to the preceding 12 months ended 6/30/12.
The company’s new technologies in digital and mobile payments will help produce solid growth during the next several years.
AXP shares are undervalued at 13.4 times latest EPS. The shares are low risk and offer a dividend yield of 1.4%. Warren Buffett’s Berkshire Hathaway owns 13% of AXP.
More than 90% of the mobile offshore drilling rigs manufactured in the past 20 years use drilling components manufactured by National Oilwell Varco (NOV).
Oil and natural gas companies are focusing on oil drilling and placing less emphasis on natural gas drilling because of the low prices and proﬁts of natural gas. The switchover is creating new demand for National’s products and services.
In August, the company agreed to purchase Robbins & Myers for $2.5 billion. Robbins makes pumps and valves for the oil drilling industry, and the company’s rapid sales and earnings growth will enhance National’s results in future years.
National’s sales and earnings jumped 32% during the past 12 months ended 6/30/12. Sales and EPS will likely increase 15% during the next 12-month period.
NOV sells at a reasonable 15.4 times my forecast EPS of 6.25. The stock pays a dividend yielding 0.6% and is low risk.
Nu Skin Enterprises (NUS) develops and distributes personal care products and nutritional supplements. Based in Provo, Utah, Nu Skin derives a whopping 86% of sales from outside North and South America. Europe contributes less than 10% of sales.
Weak sales in Japan and Europe are being offset by quite strong sales throughout Nu Skin’s other markets. New products are selling well, and additional products will be introduced during the next several months.
Nu Skin’s sales increased 23% and EPS soared 56% during the past 12 months ended 6/30/12. I expect sales to increase 12% and EPS to rise 14% during the next 12 months.
At 13.8 times latest EPS, NUS shares are attractive. The dividend yield of 1.9% and low risk rating create an excellent investment opportunity.
Learn more about this financial newsletter at J. Royden Ward's Cabot Benjamin Graham Value Letter.