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How to Screen for Classic Value Stocks

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Welcome to Episode #85 of the Value Investor Podcast

Every week, Tracey Ryniec, the editor of Zacks Value Investor portfolio service, shares some of her top value investing tips and stock picks.

The growth stocks, especially the big cap FANG names like Amazon, are hitting new all-time highs again.

But that doesn’t mean there isn’t value to be found in this market.

Tracey decided to do a narrow screen to find only those with classic value fundamentals.

What are the Classic Value Criteria?

1.      A P/E ratio of 15 or lower.

2.     A P/B ratio of 3.0 or under, although if you really wanted a deep value dive, you could look for those under 2.0.

3.     A P/S ratio under 1.0 which indicates that you’re paying less for that $1 in sales.

4.     A PEG ratio under 1.0. Value investors should look for some growth, right?

She also screened for Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks which should mean that the companies have rising earnings estimates.

This should be a very narrow screen because it is a lot of specific criteria to fill. As it is, there are about 900 Zacks Rank #1 and #2 stocks and then you are adding not just one value criteria, but four of them.

The screen returned 26 stocks.

Out of those 26, Tracey picked 5 of the classic value stocks with a Zacks Rank #1 (Strong Buy) or #2 (Buy) that she found the most intriguing.

5 Classic Value Stocks with a Top Zacks Rank

1.      BP plc (BP - Free Report) is a British big oil company with worldwide energy operations. The energy stocks are back out of favor which is why it’s so cheap. It has a price-to-sales ratio of just 0.5. It also pays a hefty dividend, currently yielding 6%. BP is a Zacks Rank #2 (Buy).

2.     Cigna Corporation (CI - Free Report) is a health insurance company that recently announced it would acquire pharmacy benefits manager Express Scripts. Shares are cheap, with a forward P/E of just 12.9. It’s a Zacks Rank #2 (Buy).

3.     Meritage Homes Corporation (MTH - Free Report) is one of the smaller home builders with a market cap of just $1.9 billion. The homebuilder stocks have sold off in 2018 on fears about rising mortgage rates. Meritage trades with a forward P/E of only 9. It’s a Zacks Rank #2 (Buy).

4.     Oshkosh Corporation (OSK - Free Report) makes specialty trucks including for defense, fire & emergency and commercial trucks including concrete mixers. Founded in 1917 in Wisconsin, it is trading with a P/S ratio of just 0.8. It also pays a dividend, currently yielding 1.2%. Oshkosh is a Zacks Rank #2 (Buy).

5.     Realogy Holdings Corporation (RLGY - Free Report) operates real estate franchises around the country including Century 21, Coldwell Banker, Sotheby’s International and Better Homes & Gardens. It’s a mid-cap company with a market cap of just $3.5 billion but it pays a dividend, which is currently yielding 1.4%.

It’s not easy being a value investor. You have to go against the grain.

It may mean investing in industries and sectors that no one else likes or otherwise seem “boring.”

What else should you know about screening for classic value stocks?

Find out on this week’s podcast.

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