One of the many strategies to invest in the stock market is to invest in companies trading at lower multiples than their peers or competition. There can be reasons why the companies are trading at lower prices such as margins have fallen; the business model has changed and the company has not changed enough; new management is needed; the company has too much debt; the sector is out of favor; and a host of others. One idea is to combine value metrics with quality earnings metrics and choose the best of the companies.

Julie Michaels of CPMS Morningstar Research examined companies and used the following criteria:

Price to trailing earnings (ratio of a company’s latest price to its trailing 4 quarters of operating earnings per share). This number can be interpreted as the multiple that investors are willing to pay for a firm’s reported operating earnings.

Price to trailing cash flow (ratio of company’s price to trailing 4 quarters of cash flow from operations)

3 month analyst estimate revisions (current consensus estimate for EPS versus 3 months ago)

Yield on expected dividends (estimated annual dividend rate expressed as percentage of the latest market price of the stock)

Ms. Michaels also added a number of other variables: the companies need to have a market capitalization of greater than the current CPMS median (be larger companies); the average daily value traded of stock be greater than $24 million); the dividend yield be greater than 2%; the quarterly earnings momentum (rate of change of quarterly operating earnings per share) greater than the current CPMS median; at least 3 analysts providing EPS estimates for the current year of the stock and 3 month estimate revisions greater than minus 5.0.

Company                           Mkt Cap   Price to       Price to     3M Analyst   Qtrly Earnings   Div

(US $ Bil)   trailing E       trailing CF   Estimate       Momentum    Yield %

Ford                                 53.593         6.18                 4.11              7.69             25.97                   4.45

GM                                   48.165         5.75                 3.74              3.10               7.94                  4.86

CenturyLink                   14.808         9.80                 2.74           ­-0.57             1.46                  7.96

HP                                     23.240         5.15                 2.56         -0.62               0.78                 3.71

Magna Intnl                     16.077         8.82                 5.91           1.65              2.68                 2.47

Travelers Co                   33.373         10.46               4.29           0.00                 1.23                 2.35

Oneok Partners               10.847       19.30               7.79           4.52                18.04               8.33

AT&T                               241.007         14.03              5.69         0.70                 2.73                 4.90

Best Buy                         10.402       11.20               6.11               1.74                 2.50                   3.48

American EagleOut     2.829         13.63               6.98             8.62                 6.50               3.20

Verizon                           207.483     12.63               6.12           -0.50                1.0               4.44

Linking to dividend paying stocks, there are a many companies on the exchange and a few pay dividends. Companies go through cycles, they go through enhanced margins, they go through the competition. Sometimes there are values and relatively easy money to be made. In this analysis the extra metrics were is the coming making money and will it continue to, if the answer is yes then the street will eventually reward it with a higher multiple on its earnings or higher stock prices. No one knows when, for the only perfect information is based on the past. By examining companies through a variety of lens you lessen the risk and potentially increase the easier money to be made.

There are more questions than answers, till the next time – to raising questions.