3 stocks for Buffett-Graham devotees

These companies meet the value criteria of both investment gurus.

By TheStockAdvisors Sep 24, 2012 12:23PM
 Stock investor, copyright Tom Grill, CorbisBy J. Royden Ward, 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's at Columbia University and later worked for Graham for several years.

In our latest special report, I've combined Buffett's and Graham's criteria for choosing stocks. Here we'll look at three high-quality stocks that sell at sensible prices, offer reasonable appreciation potential and provide solid dividends.

To find these Graham-Buffett-style investment opportunities, I looked for stocks with:

  •   Free cash flow of more than $20 million
  •   Net profit margin of more than 15%
  •   Return on equity of more than 15%
  •   Discounted cash flow value higher than current price
  •   Market capitalization of more than $1 billion
  •   Standard & Poor's rating of B+ or better
  •   Positive earnings growth during the past five years with no deficits
  •   Dividends currently paid
I am confident these stocks will fare very well during the next six months.

Aflac (AFL)
Aflac 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. Noncancer insurance policies now account for 70% of new sales.

Sales increased 13% and earnings per share rose 9% during the 12 months ended June 30. 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 earnings per share (EPS), which is well below the 10-year average price-to-earnings (P/E) ratio of 10.6. The 2.7% dividend yield adds significant value.

American Express (AXP)
Established in 1850, American Express  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 June 30.

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.

National Oilwell Varco (NOV)
More than 90% of the mobile offshore drilling rigs manufactured in the past 20 years use drilling components manufactured by National Oilwell Varco.

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 June 30. 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.

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