August is now behind us, and it gave us the worst monthly performance since May 2012.
Please don’t be too upset, because in less than two years, stocks are up 56 percent and we have not had a 10 percent correction. I also remember many professionals six to 12 months ago saying “buy the emerging markets.”
That has not worked out well, to say the least.
Some investors are worried about Syria. Let me remind you that Syria is not a big oil producer and controls no key transport hubs or routes. There is still plenty of cash on the sidelines waiting for an entry point, and according to JPMorgan investment group, nearly 3 out of 5 fund managers are trailing their benchmarks this year, and nearly a third are behind by 2.5 percent or more.
Last week, we had some great numbers on jobless claims, and the ISM nonmanufacturing number showed the economy is doing OK.
Is there anything that worries me? Yes.
While Syria fundamentally isn’t a problem, bombs being dropped anywhere around the world can give the market pause. And I’m already starting to hear about the debt ceiling talk, which can cause for some market turmoil.
One other thing that bothers me is when the market gets a little too loose and investors don’t pay attention to what they are buying, and we see companies such as Tesla Motors and Facebook trading at ridicules valuations. This, too, can cause a pullback in the market.
So be patient. Be prepared to buy on the dips, but no matter what you do, don’t try to time the market and go all into cash; you could miss some great returns come Dec. 31, 2013.
The other thing I need to mention is that good companies with reasonable valuations to buy are becoming harder to find.
But I did find one this week that surprised me, and maybe it will you: Discover Financial Services (DFS), which has a market cap of nearly $24 billion and still has some room to grow. Now, you may think this company is just the Discover card, but I discovered that is not all they do. They offer private student loans, personal loans, home loans and prepaid cards. They also operate Pulse, an automated teller machine; debit and electronic funds transfer network; Diners Club; and a global payment network system as well.
The valuation ratios on Discover look pretty good, starting off with a PE ratio of 9.4, compared with the industry average PE of 12.4. Price to sales does favor the industry at 2.58, versus Discover at 2.69. Price to book is a better deal for the company at 2.34, compared to the industry average of 2.77. Lastly, price to cash flow for the company is 8.6, slightly higher than the industry at 7.7.
Investors will also receive a 1.7 percent yearly dividend, which uses only 11.3 percent of the earnings from Discover.
Sales are up 14 percent year over year for DFS, beating the industry growth over the same period of 8.9 percent. Earnings per share also look good for the company, climbing 20 percent not quite as good as the industry growth of 23 percent. But I would still be happy seeing a company grow its EPS 20 percent year over year.
Financial companies have different accounting and debt levels, so when you see the 175 percent debt to equity of Discover, don’t panic; realize that the industry average is 291 percent and that this company is doing a great job on its balance sheet.
The company makes about 30 cents at the bottom line based on its net profit margin of 30.2 percent. That is nearly 50 percent greater than the industry average of 20.7 percent. It is also nice to see the return on equity very strong at 27.4 percent -- well above the industry’s 17.9 percent.
Looking out to December 2014, the mean estimated EPS is $4.98. This tells me two things: First, based on that number, investors are paying only 9.8 times forward earnings, which is a pretty good value since many companies are now trading closer to 15 times forward earnings.
The second thing it tells me is that if one places a multiple of 16.5 on those earnings, the target sell price is $82.17, roughly a 67 percent gain from current levels.
I also liked the PEG ratio, which is the PE divided by growth. This tells what investors are paying for the future earnings of the company -- the lower the number the better. Discover has a PEG of only 1.17; I like a PEG under 2.00.
So you may want to discover Discover. But remember, if you invest in any company, be sure to follow in detail what it is doing. Business can move quickly. If you’re not watching your business, you could look at it one day and be very disappointed with your investment.
Have a question or a company you'd like me to take a look at? Email me at email@example.com.
Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.