GMO's Jeremy Grantham, the longtime bear who in late 2008 and
early 2009 said stocks had become cheap for the first time in more
than two decades, is sounding gloomy again. In his latest quarterly
letter, released last week, Grantham says he thinks U.S. stocks
have blown past fair value and are now "very overpriced".
But Grantham says one particular area of the market is still
offering good buys: U.S. high-quality large-caps. And he's not
alone. BusinessWeek reported this week that two other fund managers
with excellent long-term track records -- Thomas Perkins and Donald
Yacktman -- are finding bargains in similar areas. Perkins, whose
Mid Cap Value fund has beaten 94% of its peers in the past decade,
says large-caps "have gotten so cheap that they should outperform
for the next several years"; Yacktman, whose fund has beaten 99% of
funds in its category over the past three, five, and ten years,
according to Morningstar, has big positions in high-quality blue
While my Guru Strategies -- each of which is based on the approach
of a different investing great -- are currently finding value in a
number of different areas of the market, Grantham's, Perkins', and
Yacktman's comments got me wondering which large-caps these models
might be highest on right now.
One of the best of the bunch:
The TJX Companies
), which garners approval from an impressive trio of my models --
those inspired by the approaches of Warren Buffett, Peter Lynch,
and James O'Shaughnessy.
TJX, whose businesses include discount clothing chains T.J. Maxx
and Marshalls, held up very well during the recession as consumers
shunned high-priced items and looked for bargains. But the
$19-billion-market-cap firm's solid track record goes back much
farther than that -- it has upped earnings per share in each year
of the past decade, one of the reasons my Buffett-based model is so
high on it. This conservative approach also likes that TJX has more
annual earnings ($1.19 billion) than long-term debt ($790 million),
and that it has averaged a stellar 37.2% return on equity over the
Lynch, meanwhile, found undervalued growth stocks using the
P/E/Growth ratio, and the model I base on his writings looks for
yield-adjusted P/E/Gs under 1.0. At 0.81, TJX delivers. The Lynch
approach also likes conservatively financed firms, and TJX, with a
debt/equity ratio of about 27%, appears to fit the bill.
My O'Shaughnessy-based growth model is also high on TJX, thanks in
part to the firm having upped EPS in each of the past five years.
This model also looks for a key combination of characteristics: a
high relative strength -- a sign that the market is embracing the
stock -- and a low price/sales ratio -- a sign the stock hasn't
gotten to pricey. With an RS of 70 and a P/S of 0.95, TJX makes the
Another large-cap blue chip my models are high on: Indiana-based
Eli Lilly & Co.
), which has a market cap of about $40-billion. Lilly gets strong
interest from my David Dreman-based contrarian approach, which
targets strong firms whose shares have been beaten down because of
fear or apathy. Lilly's P/E and price/dividend ratios now both fall
into the market's bottom 20%, making it a contrarian play according
to this model. But while fears about the new healthcare legislation
have helped drive those valuation metrics down, my Dreman-based
approach sees a lot to like about Lilly, including its 47.55%
return on equity, 24.16% pre-tax profit margins, and 5.6% dividend
The model I base on the writings of hedge fund guru Joel Greenblatt
also likes Lilly, thanks to the stock's strong 13.3% earnings yield
and 93.7% return on capital. Those figures make Lilly the 18th-best
stock in the market, according to this model.
Finally, a pair of big blue-chip beverage rivals are getting high
marks from my models --
The Coca-Cola Company
Coca-Cola -- a major holding of Buffett's
) -- gets approval from my Buffett-based approach, thanks in part
to the fact that its EPS have declined in only one year of the past
decade. The Buffett model also likes that Coca-Cola ($124 billion
market cap) could pay off its $4.4 billion in debt in less than a
year based on its $7.1 billion in annual earnings. And it likes the
firm's 29.4% average return on equity over the past 10 years.
My O'Shaughnessy-based value model, meanwhile, likes Coca-Cola's
size, strong cash flow ($3.65 per share vs. the market mean of
$0.82), and solid 3.3% dividend yield.
While Buffett prefers Coke to Pepsi, my Buffett-based model sees
room for both beverage titans. It likes Pepsi's solid earnings
track record over the past decade, as well as its 32% average
10-year ROE. Pepsi has more debt than Coca-Cola -- almost $20
billion vs. $6.3 billion in annual earnings -- but not so much that
my Buffett model sees a problem.
My O'Shaughnessy-based value model also has strong interest in
Pepsi, thanks to the firm's size ($105 billion market cap), $4.89
in cash flow per share, and decent 2.8% dividend yield.
Disclosure: I'm long TJX, LLY, KO, PEP, and PFE.