Narrowing Down High-Quality Dividend Growth: Lam Research Is Looking Good

Narrowing Down High-Quality Dividend Growth: Lam Research Is Looking Good

Aaron Hawkins/iStock via Getty Images Introduction and Background

There’s a lot of uncertainty in the current investing environment. If you’re looking for someone to predict the future or perfectly time the market, you probably better move on. However, if you’re looking for solid long-term investments that are potentially trading at fair to bargain prices, I believe the results presented here are a good starting point.

By maintaining a list of the highest quality companies and consistently tracking their valuations, I have confidence to invest when the right time arrives regardless of things happening in the market. Will this always result in timing the market perfectly, no, but I do believe this will be a favorable strategy long term. Because of current uncertainties and fear in the market, I’m finding more high-quality companies trading at or below fair value than I have seen in quite a while.

Let’s look at all the companies on my list that are high-quality, consistent dividend growers, are trading below 20% above Future Fair Value, and below 10% above Historical Fair Value. My Future Fair Value estimate tends to be conservative, and it’s also based on some prediction of future performance, which carries more uncertainty, hence the higher threshold for FFV.

Using this very simple first pass criteria, we will be further exploring the following list of companies: Finbox, Seeking Alpha, Author’s Analysis Finbox, Seeking Alpha, Author’s Analysis Finbox, Seeking Alpha, Author’s Analysis Finbox, Seeking Alpha, Author’s Analysis Fair Value Estimation

As I’ve described in previous articles, I like to calculate a fair value in two ways, using a Historical fair value estimation and a future looking fair value estimation. The Historical Fair Value is simply based on historical valuations. I compare five-year average: Dividend yield, P/E ratio, Schiller P/E ratio, EV/EBITDA, and P/FCF to the current values and calculate a composite value based on the historical averages. This gives an estimate of the value assuming the stock continues to perform as it has historically. I also want to understand how the stock is likely to perform in the future so utilize the Finbox fair value calculated from their modeling, a Cap10 valuation model, FCF Payback Time valuation model, and 10-year earnings rate of return valuation model to determine a composite Future Fair Value estimate.

I also gather a composite target price from multiple analysts including Reuters, Morningstar, Value Line, Finbox, Morgan Stanley, and Argus. I like to see how the current price compares to analyst estimates as another data point and as somewhat of a sanity check to my own estimates.

Plotting three variables on one plot is tricky but using a bubble plot allows us to visualize three variables by plotting the Historical fair value vs. the Future Fair Value on a standard x-y chart, and then use bubbles to represent the size of discount relative to analyst estimates. Author calculation of Historical and Future Fair Value, analyst estimates This chart is insightful once you understand how to interpret it. What we’re looking for are stocks that are trading at a discount to both the Historical Fair Value and the Future Fair Value. So, those stocks that are farther to the left, and farther to the bottom, are potentially the stocks trading at the largest discount to fair value. This would be the bottom left quadrant of the graph. Additionally, those stocks with the biggest bubbles are the stocks that are trading at the largest discount to analyst estimates, so in theory, stocks in the lower left quadrant that also have large bubbles, should be very decent candidates for investment.

This month, we see several high-quality companies trading at a discount to both Historical Fair Value and Future Fair Value. Looking at the chart, 3M Company ( MMM ), Merck & Co ( MRK ), United Parcel Service ( UPS ), Expeditors International of Washington ( EXPD ), Bristol-Myers Squibb ( BMY ), Intel Corp ( INTC ), V.F. ( VFC ), and Blackrock ( BLK ) all appear to be trading at values below the Historical Fair Value and Future Fair Value. They also have upside based on analyst estimates. Another stock that’s interesting is Lam Research ( LRCX ) which is trading around fair value based on Historical Fair Value, but well under fair value based on Future Fair Value. The Future Fair Value estimation tends to be conservative, so it’s not often I see stocks trading so far below the potential Future Fair Value.

I already own 3M, Merck, UPS, Intel, and Blackrock. I also […]

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