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What is the Most Powerful Combination in Value Investing?

  • (0:30) - Earning Season's Effect on Value Stocks
  • (2:15) - Applied Optoelectronics: Rising Estimates
  • (5:45) - Stock Screener: Zacks Rank #1 and P/E Under 20
  • (7:15) - Tracey's Top Stock Picks
  • (14:00) - Episode Roundup:    

Welcome to Episode #53 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.

It’s the middle of earnings season and many are complaining about the valuation of the stock markets (again).

Several of the major indexes continue to hit new all-time highs which has some investors fretting. But there are still value stocks out there despite stocks moving higher every month.

The Key for Value Investors

Most value investors look to one key metric to start their value stock search: The P/E ratio. Remember that the P/E is price divided by earnings.

During earnings season, we’re getting new information about the “E”, or earnings, in the P/E. For some companies, the “E” will dramatically rise.

If that company’s stock is also rising, it may remain a value stock because the “E” is rising.

For value investors, a rising “E” is critical.

Why Rising Earnings Matter for Value Investors

An example of the importance of the rising “E” can be found with Applied Optoelectronics AAOI. Tracey has covered it on prior podcasts because it was a value stock that was up over 100% in 2017.

How could its valuation still be attractive with that kind of stock move?

Ninety days ago, analysts believed Applied Opto would make just $3.76 a share this year. But the estimate has been slowly rising the last 3 months and now sits at $4.95.

Because of rising earnings estimates, Applied Opto has a forward P/E of 19.7. That’s not much higher than the average of the S&P 500.

It would have a P/E of about 25 if the “E” wasn’t exploding to the upside and had remained around $3.76.

The Most Powerful Combination

Value investors obviously want solid value fundamentals when buying a stock. But if they can also get rising earnings estimates at the same time, then something truly special may be going on there.

Tracey did a screen for stocks with P/Es under 20, a P/S ratio of 1 or under and that had a Zacks #1 (Strong Buy) rank, which indicates rising earnings estimates.

18 stocks came up in her screen so she whittled it down to these 3 top stocks.

3 Value Stocks with the Powerful Combination

1.     First American Corporation FAF has a forward P/E of 14.1 and the full year estimate has jumped to $3.42 from $3.28 in the last 90 days. Don’t overlook this title insurance company.

2.    ManpowerGroup MAN is a worldwide staffing company. Shares sold off after its last earnings report BUT earnings estimates were also adjusted higher. That brought the stock back to value territory. It has a P/E of 15.9. Earnings are expected to be $6.73, up from $6.55 just 90 days ago.

3.    LPL Financial (LPLA)is the largest independent brokerage firm in the United States with over 14,000 independent financial advisors. Over the last 3 months, the 2017 Zacks Consensus Estimate has jumped to $2.62 from $2.42. Earnings are expected to grow 23%. It has a P/S ratio of 1.o.

What else should you know about the powerful combination of rising earnings estimates and value investing?

Find out on this week’s podcast.

Want more value investing insights from Tracey?

Value investors are a special breed of investor. They don’t follow the herd.

If that is your style of investing, be sure to check out Tracey’s weekly Value Investor service to receive more in-depth analysis on value companies and see which stocks she thinks are the best bargains now.

The Value Investor portfolio holds between 20 and 25 value stocks for the long haul.

Click here to learn more>>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Applied Optoelectronics, Inc. (AAOI): Free Stock Analysis Report
LPL Financial Holdings Inc. (LPLA): Free Stock Analysis Report
First American Corporation (The) (FAF): Free Stock Analysis Report
ManpowerGroup (MAN): Free Stock Analysis Report
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