Finding Value In A High-Priced Market

Jun 11 2014, 4:52pm CDT | by

In many ways, it was difficult to be an investor in 2013 and not make money. With all the broad indexes making sharp advances, nearly everyone with exposure to equities saw their portfolio ramp up in value. Though the markets have continued their upward trajectory this year, the ride has been bumpier and far more unpredictable.

With valuations inflated, there has been a significant rotation out of growth stocks and into value. The extreme case exemplifying this trend is Twitter, which exploded after its IPO but is down close to 50% this year.

At the same time, a series of conflicting economic reports have muddled the picture for investors and make it difficult to determine the overall health and direction of the economy. Amid these gyrations, it has become increasingly difficult to pick winners. So what’s a viable option for investors attempting to find value in this high priced market?

Perhaps the best place to start is with mature companies on the brink of a rebound. Specifically, seek out firms that suffered through a series of negative headlines but which are nonetheless well positioned with enough critical mass and brand awareness in the marketplace to stage a comeback. The following three companies fit this description:

*Target – According to reports, as many as 110 million people had their personal and credit card and/or debit card data compromised as a result of Target’s security breach late last year. Making matters worse for the company, it was exposed just as the holiday shopping season was kicking into full gear. The breach not only cost Target’s CEO his job but it highlighted a number of other issues that are currently plaguing the company, including struggles within its online business as well as its poorly executed expansion effort into Canada – which thus far has resulted in losses of nearly $1 billion. Even so, Target remains the second largest retailer in the United States, behind only Walmart, selling everything from groceries to apparel to home furnishings. The company will find its way back, and when it does its current valuation could seem cheap given that it is now trading at half of yearly revenues, which, historically, is very low.

*General Motors – General Motors has issued more than two dozen automobile recalls this year affecting nearly 16 million cars. The most high profile of which stems from faulty ignition switches across multiple vehicle lines that have been related to the deaths of 13 people and prompted the firing and reorganization of numerous GM employees. But if there’s one company that has shown it can weather negative headlines, it’s GM. It has already returned to profitability following the government bailout during the financial crisis. This time around the obstacles are not nearly as steep. With about $27 billion cash on hand and the government having sold its remaining shares at the end of last year, the company is on sturdy ground. Meanwhile, it recently reinstituted its dividend, which at 3.30% is lofty in today’s environment. Given all this, GM is currently trading at a discount following a 10% decline in share price year-to-date.

*ADT – As America’s largest home security firm, ADT is an established company still trying to find its legs after spinning off from Tyco International in 2012. Tyco became a symbol of corporate greed and excess in the early 2000s after former chairman and CEO Dennis Kozlowski swindled millions from the company.

Earlier this year, ADT stock plummeted nearly 24% in three days following a disappointing earnings report. But reflected in those numbers were a series of investments ADT made into new digital product offerings that should help drive future growth. Spinoffs typically work. They sometimes just take time. With housing on the rebound nationwide and the fact that 92% of its revenues are recurring, ADT has a strong foundation on which to recover much of its lost value – and then some.

Investors still looking for upside opportunities within the equity markets need to own up to a potentially unpleasant fact: It could be a long time before the markets perform like they did last year.

If 2013 was a year that rewarded all types of investors in equities, then 2014 will ultimately favor those who are more savvy, selective and disciplined.

With that said, there is indeed value to be found in the equity markets, and it’s frequently in places that are not unfamiliar to the average consumer. But uncovering that value does require a little extra homework.

Ben Marks is president and chief investment officer of Marks Group Wealth Management, a Minneapolis investment advisory with approximately $550 million in assets under management.

 
 

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