Large Caps on New Low List

In addition to Verizon (VZ), mentioned in my last post, there continue to be attractively valued large cap stocks hitting new lows in the latest market drop. Both of these names sell for about 13 times this year’s earnings and 12 times next year’s estimates. Pretty cheap valuations for both of them.

 

General Electric (GE) ~$30

Fortunately for those who have owned the stock for a while, the days of investors paying 30 or 40 times earnings for this industrial conglomerate are over. With a far more reasonable valuation at hand, investors can actually get some value out of GE shares. Due to the company’s high exposure to financial services (they lend money to many big ticket customers to aid in financing equipment purchases), GE stunned analysts by missing first quarter earnings estimates and ratcheting down its outlook for the full year. As a result, GE shares made new lows under $30 per share, yield a dividend of over 4%, and now trade at a discount to the overall market.GE followers are used to the stock fetching a premium to the market, but value investors finally have an intriguing market bellwether to consider adding to their portfolios.

Microsoft (MSFT) ~$27

The Yahoo hangover seems like it will never end, but it will at some point this year. Before the Yahoo offer was made, MSFT’s business was clicking on all cylinders and the shares had reached the mid thirties. We can argue whether getting Yahoo would boost MSFT’s financials or not, but even if we assume no incremental benefit one way or the other, it is hard to make the case that MSFT shares are only worth 27 bucks. Either way, a move back into the thirties is likely. While it would happen pretty quickly if Yahoo finally decided to remain independent and the end of the saga finally arrived, even a MSFT/YHOO combination would likely result in a higher stock price in the intermediate term, as Yahoo has little bargaining power to extract an excessive purchase price above the $33-$34 offered previously.
Full Disclosure: Peridot clients are long shares of the companies mentioned at the time of writing

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3 Thoughts on “Large Caps on New Low List

  1. Anonymous on June 10, 2008 at 5:36 PM said:

    Haven’t heard anything about Sears for a while. Still bullish?

    Also, I don’t read your blog as much because there aren’t enough posts per page. You’re losing pageviews you used to get from me, and probably others.

  2. Chad Brand on June 11, 2008 at 6:37 AM said:

    I upped the posts on the main page from 3 to 8 per your suggestion.

    As for Sears. my last comment was after they decided to split the management of the company into a holding company structure. My take home message was that such a move would hopefully allow for faster decision making and unlocking some shareholder value, but we would have to wait and see if that actually was the result.

    Since then, very little has changed. The retail environment remains very weak and yet the company has made no meaningful moves to unlock value or diversify its business. They just keep buying back stock, which is fine with me, but more needs to be done with the core business.

    I have not been adding shares of SHLD and in some cases have actually been cutting back the position. With the weak retail market, stocks like TGT have gotten cheap enough that new money might be better served going there until SHLD shows signs they really are more than just a sub-par retailer.

    Until they show some life in that regard, I likely will not become more bullish on the stock. There is value there, but if management does not unlock it adequately, Wall Street won’t take notice.

  3. Rubens on June 16, 2008 at 9:01 AM said:

    I totally agree with you on Microsoft and disagree on Verizon and GE. Having negotiated with GE and known some of their inner workings, I wouldn’t touch that stock now. There should have been billions of write-offs in their consumer and specialty finance divisions (part of GE Capital). I think they are still in denial and smoothing earnings, very slow to recognize losses. I also find it tough to make a long-term investment in Verizon at a time people are dropping their landlines in masses and companies are switching from conventional telephone to VOIP. I couldn’t believe when I read more than 25% of the people under 30 years old have dropped their landlines and rely only on cell phones, but apparently it’s true. Verizon is probably the best U.S. cell phone operator, but that market is mature and not growing either.

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