Finding $30,000 of value in the stock market — Picking the right stocks

This is the third post in our guest author Paul Maplesden’s series. Find part one here and part two here.

Paul is a freelance writer, specializing in business, finance, entrepreneurship, and marketing. Find out more at www.PaulMaplesden.com.


How do you find deep value? It’s time to pull back the curtain…

As you’ll know from my previous posts, I’m using the Simply Wall St (SWS) app to find stocks that I think can beat the S&P 500 over the medium to long term. I’m confident enough that I am investing $30,000 of my own money in those stocks in the hopes of meeting or beating the market benchmark.

In this article, I’ll reveal the stocks that I have chosen, why I chose them and provide a way for you to see how they perform.

In my first post, ‘Me, Simply Wall St and a $30,000 experiment’, I discussed my approach and philosophy to investing, together with why I thought Simply Wall St was a good way to research businesses that I would be comfortable investing in. My approach to investing is:

  • Expect to buy and hold positions for a minimum of 3 years
  • Attempt to match or beat the S&P 500 index over the medium to long term
  • Not to be influenced by short-term, day to day stock movements, trends and news (the ‘emotion’ of the market); this means no day-trading, swing-trading or other short-term targets
  • To have a diversified portfolio — Not more than one or two businesses per industry / sector and a variety of super-large, large, medium and small caps
  • A $2,000 investment in each position, with a maximum of 15–16 positions
  • A minimum share price of $10 to avoid penny stocks and only trade in liquid positions
  • Hold US stocks only (NYSE and Nasdaq)

My second article Diamonds in the Rough — Finding Good Investments’ went into detail about how I was using the app to filter and identify the best companies to buy into. As a recap, my criteria for picking good companies were:

  • The business must have strong financial health (SWS health score of 4+ preferred)
  • It must pay a dividend (SWS income score of 3+ preferred)
  • It should be undervalued and room for growth (SWS value score of 4+ preferred; discounted cash flow price higher than current stock price)
  • A good track record is preferable (Decent past earnings, good future earnings potential)
  • It should have a reasonable market capitalization and reliable analysis
  • No utility, energy or defense stocks (personal preference)

How I picked stocks

Source: Low voltage labs via Flickr

With all of this in mind, I went through all of the stocks on SWS that met my criteria and approach and came up with a short-list of around 80 stocks. I then went through each of those stocks in detail, analyzing the data on SWS and creating a final list of stocks that I would invest in. Overall, the exercise took me a couple of days to complete. I then purchased the stocks in late February / early March 2015.

My selection criteria is probably the most similar to the SWS ‘Deep Value’ view here.

Click to see the ‘Deep Value’ view on SWS

Note: Since writing some of the ‘Snowflakes’ have already changed in SWS.

What stocks did I choose?

The stocks that I chose are as follows:

Blue Capital Reinsurance Holdings Ltd. — BCRH

Value: 5 Health: 3 Income: 5 Dividend yield: 6.4%

Blue Capital Reinsurance Holdings Ltd., through its subsidiaries, offers collateralized reinsurance in the property catastrophe market.

Notable areas:

  • Significantly undervalued (>35%)
  • Good price based on past earnings, expected growth and assets
  • 60% expected growth over three years
  • 380% earnings growth last year
  • Very low debt
  • Excellent dividend yield

China Distance Education Holdings Limited — DL

Value: 5 Health: 5 Income: 5 Dividend yield: 4.7%

China Distance Education Holdings Limited provides online and offline education services, and sells related products in the People’s Republic of China.

Notable areas:

  • Significantly undervalued (>40%)
  • 98% expected growth over three years
  • Excellent projected return on equity over one and three years
  • Good returns on capital and assets
  • Excellent dividend yield
China Distance Learning is expected to grow earnings over the next 3 years.

Copa Holdings SA — CPA

Value: 5 Health: 4 Income: 4 Dividend yield: 3.22%

Copa Holdings, S.A. provides airline passenger and cargo services in Latin America.

Notable areas:

  • Undervalued (>30%)
  • Good value based on past growth, projected earnings and value of assets
  • 34% expected growth over three years
  • Good dividend yield
Copa is looking significantly undervalued.

Eagle Materials — EXP

Value: 4 Health: 4 Income: 1 Dividend yield: 0.49%

Eagle Materials Inc. manufactures and distributes building products used in residential, industrial, commercial, and infrastructure construction in the United States.

Notable areas:

  • Undervalued (>20%)
  • Good value based on expected growth and assets
  • 160% expected growth over three years

EMCOR Group Inc. — EME

Value: 3 Health: 5 Income: 4 Dividend yield: 0.7%

EMCOR Group, Inc. provides electrical and mechanical construction and facilities services to commercial, industrial, utility, and institutional customers in the United States.

Notable areas:

  • Undervalued (>15%)
  • Good price based on value of assets
  • Low dividend payout; hoping to see this improve

GameStop Corp — GME

Value: 5 Health: 5 Income: 5 Dividend yield: 3.5%

GameStop Corp. operates as a multichannel video game, consumer electronics, and wireless services retailer.

Notable areas:

  • Undervalued (>20%)
  • Good price based on past earnings and future projections
  • Good return on equity and assets
  • Low levels of debt
  • Good dividend payout

IXYS Corp.- IXYS

Value: 4 Health: 6 Income: 3 Dividend yield: 1.16%

IXYS Corporation, an integrated semiconductor company, designs, develops, manufactures, and markets power semiconductors, digital and analog integrated circuits (ICs), and systems and radio frequency (RF) power semiconductors worldwide.

Notable areas:

  • Undervalued (>20%)
  • Good price based on expected growth and value of assets
  • Over 500% earnings growth expected over three years
  • 280% earnings growth last year
  • Low levels of debt
ICXY is in a great financial position.

Johnson and Johnson — JNJ

Value: 2 Health: 6 Income: 5 Dividend yield: 2.77%

Johnson & Johnson, together with its subsidiaries, researches and develops, manufactures, and sells various products in the health care field worldwide.

Notable areas:

  • Good value based on assets
  • Good return on equity over one and three years
  • 19% growth last year
  • Good return on assets, equity and capital last year
  • Easily manageable levels of debt

Korn/Ferry International — KFY

Value: 4 Health: 6 Income: 3 Dividend yield: 1.25%

Korn/Ferry International, together with its subsidiaries, provides talent management solutions that help clients to design strategies in building and attracting their talent.

Notable areas:

  • Good price based on expected growth and value of assets
  • 60% expected earnings growth over three years
  • No debt

The Mosaic Company — MOS

Value: 5 Health: 4 Income: 5 Dividend yield: 2.13%

The Mosaic Company produces and markets concentrated phosphate and potash crop nutrients for the agricultural industry worldwide.

Notable areas:

  • Undervalued (>20%)
  • Good price based on projected growth and value of assets
  • 70% expected growth over three years
  • 96% growth in last year

Qiwi plc — QIWI

Value: 2 Health: 5 Income: 0 Dividend yield: Not yet announced

Qiwi plc, together with its subsidiaries, operates electronic online payment systems primarily in Russia, Kazakhstan, Moldova, Belarus, Romania, the United States, and the United Arab Emirates.

Notable areas:

  • Significantly undervalued (>40%)
  • Excellent projected return on equity over one and three years
  • 160% growth last year
  • Strong returns on equity, capital and assets
  • Very low levels of debt

Ternium S.A. — TX

Value: 6 Health: 5 Income: 5 Dividend yield: 5%

Ternium S.A., together with its subsidiaries, manufactures and processes flat and long steel products for the construction, automotive, home appliances, capital goods, container, and food and energy industries.

Notable areas:

  • Significantly undervalued (>40%)
  • Good price based on past earnings, projected growth and value of assets
  • Excellent dividend payout
Ternium currently pays a 5% dividend.

Village Super Market Inc. — VLGE.A

Value: 4 Health: 5 Income: 3 Dividend yield: 3.3%

Village Super Market, Inc., together with its subsidiaries, operates a chain of supermarkets in the United States.

Notable areas:

  • Significantly undervalued (>50%)
  • Good price based on value of assets
  • Large projected earnings growth over three years
  • 190% growth last year
  • Low levels of debt
  • Good dividend payout

Western Digital Corporation — WDC

Value: 4 Health: 5 Income: 5 Dividend yield: 2.03%

Western Digital Corporation, through its subsidiaries, develops, manufactures, and sells data storage solutions that enable consumers, businesses, governments, and other organizations to create, manage, experience, and preserve digital content.

Notable areas:

  • Significantly undervalued (>50%)
  • Good price based on expected growth and value of assets
  • 35% projected earnings growth over three years
  • 50% growth last year

Westlake Chemical Partners — WLKP

Value: 5 Health: 4 Income: 4 Dividend yield: 4.09%

Westlake Chemical Partners LP focuses on producing and selling ethylene.

Notable areas:

  • Significantly undervalued (>50%)
  • Good price based on past earnings and value of assets
  • 350% projected earnings growth over three years
  • High dividend rate

My Portfolio

Paul’s portfolio as of March 2015.

In closing

Now that I’ve chosen my portfolio, I’m going to sit and wait and see how it performs over the next few months. 2015 has been rough for the markets, so it will be interesting to see how my picks compare to the market as a whole.

Until then, happy investing!

Paul.

Disclaimer

  • Paul Maplesden is an independent writer and investor not affiliated with or employed by Simply Wall Street and provided this (and subsequent) blog posts unsolicited;
  • Simply Wall Street has not provided funds of any kind for this experiment;
  • Any data, analysis, stock picks and methods discussed in these posts are intended purely for entertainment and informational purposes and should not be seen as guidance for your investing needs or recommendations to buy, sell or hold a particular stock or other investment.