It's like shooting fish in a barrel out there. OK, that's not entirely true, but it's close. Thanks to a multitude of factors, with the S&P downgrade being the tipping point, the stock market is now on sale.
There are plenty of high quality companies trading at a significant discount to their intrinsic value, if you know where to look. That's where we focus our attention and luckily, thanks to this correction our lives have been made that much easier.
Today, we're bringing you companies that tick off a bunch of boxes. They have economic moats, strong pricing power, 5-year average, return on equity above 10%, and at least 10 years of profitability. In other words, they're badass companies that you'd kill to own and now, you can buy shares at a discount. It's hard to get it better than that.
Here's our list:
1. Occidental Petroleum Company (OXY)
Occidental Petroleum Corporation, together with its subsidiaries, operates as an oil and gas exploration and production company primarily in the United States.
OXY has an extremely impressive operating history over the past 10 years. They've more than doubled gross margins from 30% to 68%, maintained net income margins above 20%, been profitable through two recessions and for at least the past 10 years, grown shareholders' equity by over 476%, and has consistently retained on average between 20-30% of earnings.
It doesn't get much better than that.
The Vuru Growth Price valuation for OXY is $118.41, using a discounted cash flow valuation. Current market price is $84.84. This leaves a margin of safety of 39.19%.
For this valuation, we have applied a 15% discount rate and have assumed a 15% annual growth rate slowed down over the years, leaving an average annual growth rate of around 10-11%. Compare this with the market's current assumption of 1.32% growth. We calculated this by doing a Reverse DCF.
If you disagree with any our growth or discount rates, feel free to adjust them by clicking the report below and going to the "Valuation" tab.
See our OXY report here.
2. Adobe Systems Incorporated (ADBE)
Adobe Systems Incorporated operates as a diversified software company in the Americas, Europe, the Middle East, Africa, and Asia. It offers a line of creative, business, Web, and mobile software and services used by creative professionals, knowledge workers, developers, marketers, enterprises, and consumers.
Again, this is a company with a great operating history: 10 years in the black both on Net Income and Free Cash Flow, growing sharedholders' equity by over 741%, Net Income margins above 20%, huge gross margins averging 91%, consistent retained earnings growth, and have a strong history of stock buybacks.
What's probably the best part is that Adobe has a competitive advantage in their products and branding. A great example is Photoshop. It'll take a lot for someone to measure up to brand awareness and general quality of the product. Furthermore, thanks to the large margins this affords them, ADBE has extra money to spend on growing their business and buyback stock. ADBE has bought back stock 6 of the last 10 years.
The Vuru Growth Price valuation for ADBE is $33.03, using a discounted cash flow valuation. Current market price is $24.21. This provides a margin of safety of 36.43%.
For this valuation, we have applied a 15% discount rate and have assumed a 15% annual growth rate slowed down over the years, leaving an average annual growth rate of around 10-11%. Compare this with the market's current assumption of a 2.75% growth rate. We calculated this by doing a Reverse DCF.
If you disagree with any our growth or discount rates, feel free to adjust them by clicking the report below and going to the "Valuation" tab.
See our ADBE report here.
3. Oracle Corporation (ORCL)
Oracle Corporation, an enterprise software company, develops, manufactures, markets, distributes, and services database and middleware software, applications software, and hardware systems worldwide.
Oracle is a growth story first and foremost. Just have a look at this hockey stick growth in their free cash flow:
In the past 10 years, they've taken their free cash flow from $2.97B to $10.76B. That's 262.28% growth! Add in an economic moat and strong pricing power in enterprise software, 10 years of 20%+ profit margins, and an extremely strong history of buying back stock and it sounds like heaven.
The downside is that there are concerns about future growth and as a stock it's not hugely undervalued.
The Vuru Growth Price valuation for ORCL is $32.91, using a discounted cash flow valuation. Current market price is $27.45. This provides a margin of safety of 19.89%.
For this valuation, we have applied a 15% discount rate and have assumed a 15% annual growth rate slowed down over the years, leaving an average annual growth rate of around 10-11%. Compare this with the market's current assumption of a 9% growth rate. We calculated this by doing a Reverse DCF.
If you disagree with any our growth or discount rates, feel free to adjust them by clicking the report below and going to the "Valuation" tab.
See our ORCL report here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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