Paul Price (at RealMoneyPro.com) has been buying MCK and PRGO recently. He sends us a few charts illustrating his strategy, which is simply this: Buy solid companies when they are trading at valuations lower than their own historical averages, when the price is depressed due to market conditions, rather than serious company specific problems. These stocks also present excellent put writing opportunities.
McKesson (MCK) ~ Paul argues that MCK ($153.99) is undervalued by about 50%. He’s been buying the stock and selling long-term puts with a strike price of $140 – $150. He writes,
McKesson’s typical P/E has come in around 15.5x. Its present day forward multiple is just 11.1x. Of the three best buying opportunities since 2007 (green-starred below) only 2008’s absolute bottom presented a more favorable valuation.
McKesson hasn’t changed hands as low as $122 since September of 2013, a year when EPS came in at $8.35 versus an estimated $12.70 in FY 2015. The dividend has increased by 40% since the last time you could get into MCK that cheaply.
Perrigo (PRGO) ~ PRGO ($124.85) dropped recently after taking some charges associated with fighting off a hostile takeover bid by Mylan. Paul thinks the company is undervalued due to its strong balance sheet and earnings growth. He’s buying stock and selling long-term puts. The stock is cheaper now than when Paul first published this article on Feb. 18.
Peak prices of $157.50 to $215.73 were hit during each of the past three years. S&P Research and Morningstar both assign a 4-star, buy rating on PRGO. S&P sees fair value as more than $188 while targeting $200 over the next 12-months. Morningstar tags present day value at $165.