Diagnosis: Value Play

Diagnosis: Value Play

In the latest Best Game in Town, MarketShadows, March 10, 2013 

Courtesy of Paul Price

The DJIA has been hitting new all-time records. The S&P 500 is also near its record level. Things could still get hotter as ZIRP has made bonds, CDs and money markets guaranteed losers, especially after figuring in the reality of inflation and taxes. 

I like putting money to work in stocks that are not reflecting their true values, particularly after the recent stock market run-up. Laboratory testing giant Quest Diagnostics (DGX) closed last week at $55.89. That’s only 12.6 times its 2012 EPS of $4.43. That price is 4.6% lower than the DGX shares traded for at the company’s peak in 2007. 

Better still, earnings per share have advanced 56% since then (from $2.84 to $4.43). The annual dividend has surged by 200% over that same span (40-cents to $1.20). The current yield is now 2.15%, with plenty of room for future advances. 

DGX     6-years (weekly) 

DGX offers a variety of good qualities. Value Line notes its good balance sheet, high share price stability, and earnings predictability. Over the long term, Quest Diagnostics shares have outperformed 70% of Value Line’s 1700-company main research universe. The stock is primed for a catch-up rally.

DGX - Value Line Ratings 

Preserving wealth is a good thing, but what is the logical upside for DGX? Quest’s average P/E for its most recnt five peak valautions was 17.1x. A rebound to just 15 times trailing earnings would allow for a target price above $66. That conservative goal is 18.6% above the current quote. Adding in the current yield, we arrive at a high probability for greater than 20% in total return over the next 12 months. 

That’s in-line with Morningstar’s assessment. Morningstar rates DGX with four stars out of five, and sees present day fair value as $65. The stock trades for closer to its 52-week low of $53.25 than to its 2012 high of $64.87. 

DGX - Morningstar ratings 

Low risk, a moderate dividend and decent potential make this a good addition to our Virtual Value Portfolio.

We added a new position of 54 shares of DGX @ $55.54 on Thursday March 7.

Enter Email Address

Trackbacks

  1. [...] Diagnosis: Value Play     [...]

  2. [...] last week while adding one new name. Cummins (CMI) was sold for a 27.4% gain plus dividends. We bought shares of Quest Diagnostics (DGX) for the first time. DGX offers a decent yield, solid upside and a low risk [...]

  3. [...] than he did several months ago. However, he still likes Express Scripts (ESRX), Quest Diagnostics (DGX), Lab Corp. (LH), Coach Inc. (COH) and Calamos Asset Management Inc. (CLMS) at current [...]

%d bloggers like this: