Commentary by John Dorfman
May 18 (Bloomberg) -- The U.S. stock market is 31 percent above its March 9 low. Yet there are still plenty of bargain stocks around.
About 12 percent of the 2,434 U.S. stocks with a market value of $250 million or more are selling for less than eight times earnings. Such a low multiple is a flashing sign that a stock is out of favor.
Unpopular stocks are precisely the ones I want. A stock can advance only by exceeding expectations and low expectations are easier to beat than lofty ones.
Seven percent of all stocks sell for less than eight times earnings and also have total debt that I consider reasonably prudent (less than stockholders’ equity). There are 171 stocks in this group.
From among those 171, here are half a dozen that I think hold considerable investment interest now.
One is ConocoPhillips, an integrated oil company based in Houston. The company is especially interesting to me because it produced big losses for two of my investment heroes.
On June 30, 2008, Conoco shares fetched $94.39; today they trade at $43.93.
Warren Buffett, widely considered the greatest active U.S. investor, publicly berated himself earlier this month for making a “major mistake” with his 2008 purchase of ConocoPhillips. He should never have bought it, he said, when oil prices were at $140 a barrel, hovering near an all-time high.
Warren’s Folly
Buffett’s company, Berkshire Hathaway Inc., was the largest holder of Conoco stock as of Dec. 31, with almost 80 million shares.
Another investor I admire, David Dreman (my mentor in the investment business), owned 5.7 million ConocoPhillips shares at Dreman Value Management, according to a March 31 filing, having unloaded 1 million shares in the first quarter.
If Buffett and Dreman made a mistake, it was an understandable one. To me, ConocoPhillips didn’t look expensive 11 months ago, when it was near its high. Today, it looks downright cheap.
Conoco sells for five times earnings and 0.3 times revenue. It yields 4.3 percent, and the dividend looks secure.
In 2008 the company got more than twice as much revenue from refining and marketing as from exploration and production. For a refiner, falling oil prices are not necessarily a bad thing: After all, to a refiner, oil is a raw material. Other things equal, a decline in the price of a raw material increases their profit.
Non Buffett part continued at Bloomberg.
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