As the S&P 500 just finished its 8th consecutive year with positive returns, the crash of 2008 has become merely an old souvenir for many.
However per Multpl.com, the S&P 500 P/E ratio hasn’t been that high very often:
This leaves investors with money waiting on the sideline, stuck with this neverending doubt: It’s always scary to add to positions because you always think the day after you buy is the day the market crashes. Finding opportunities in the current market has been harder than ever. This is how a strong investing process and careful use of valuation models can be of help while researching for your next trades. Using the Dividend Discount Model (DDM), I’ve identified three companies that show a low double-digit potential gain.
Lockheed Martin Corporation (NYSE:LMT)
Lockheed Martin has been part of my portfolio since 2012. The company’s financial performance is closely linked to the U.S. Government military budget, as about 80% of their revenues are coming from it. Lockheed Martin Corporation (NYSE:LMT) is the world’s largest defense contractor, earning 61% of its sales from the US Department of Defense, 21% from other US government agencies, and 18% from international clients. Heavy regulation, years of symbiosis with the US Defense department and their know-how are three key elements protecting most of Lockheed Martin’s business. Let’s just say you can’t start building military aircraft and missiles in your basement to compete with this defense behemoth.
After successfully optimizing their structure to improve their earnings while revenues were struggling, Lockheed Martin made a big move in 2015 by acquiring Sikorsky Aircraft in order to increase its revenue growth potential. In 2016, they received Congress’ benediction to seek additional international contracts.
In order to determine Lockheed Martin’s fair value, I use a double stage DDM. This allows me to choose a dividend growth rate for the first 10 years and another one as a terminal rate. I’ve used the following assumptions for Lockheed Martin:
With a low payout ratio, I think Lockheed Martin Corporation (NYSE:LMT) is able to maintain high single-digit dividend growth for several years to come. However, I’ve used a 10% discount rate as the company’s business model is still highly tied to the U.S. Government’s military budget. Here are the results of my calculation:
Source: Dividend Monk Toolkit Calculation Spreadsheet