Wachovia analyst screens for convertibles with stocks at discounted P/E valuations

By Ronda Fears

Nashville, Tenn., July 16 - As the market struggles to find a bottom, valuation multiples continue to compress and there are several convertible names with stocks trading at significant discounts to the overall market, according to a report dated Tuesday by convertible analyst Sri Nadesan at Wachovia Securities, Inc.

"Although it is not at all clear where equity valuations will bottom in this current bear cycle, we looked at P/E valuation multiples for the whole market with a view to highlighting some convertible companies that are trading at a significant discount to the overall market," Nadesan said in the report.

"Although P/E multiples continue to compress, we believe, in general, companies with higher than the market average multiples face higher risks than those trading at significant discounts to the market."

Currently, the broad market indices - the S&P 500, the S&P 1500 and the Russell 3000 - are trading fairly close to each other when measured by next year's or the current year's P/E multiples, the analyst said. The three indices are trading around 14 times next year's median P/E multiple and around 16 times the current year's median P/E multiple.

The analyst used median P/Es due to the presence of negative P/Es for some companies. Or in certain cases, earnings are small, which results in outsized P/E multiples, so median multiples are more instructive.

"Although valuation multiples have compressed significantly over the past two years, it is not clear if multiples have reached a bottom," Nadesan said in the report.

"But in this environment, we believe investors should be focusing on those convertible companies of which valuation multiples are significantly below broad market multiples.

"Investors should keep in mind that P/E multiples are only one valuation benchmark. Therefore, the companies mentioned below should be viewed as a screen of ideas for further analysis."

Companies trading below 9 times next year's P/E multiple are Lennar, D.R. Horton, Fleming, E-Trade, Household International, American Greetings and Tyco International.

Companies trading at 9 times to 10 times next year's P/E multiple are Shaw Group, Cendant, SPX Corp., XL Capital, and Barnes and Noble.

Companies trading at 10 times to 12 times next year's P/E multiple are Check Point Systems, Xerox and J.C. Penney.

Companies trading at 12 times to 14 times next year's P/E multiple are America Online, Pep Boys, Omnicom, Lenox International, Hasbro, Carnival Cruise Lines, Best Buy, Inco Ltd., Legg Mason, Masco Corp. and Airborne Freight.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.