In this market, it is becoming hard to find companies that are undervalued. In particular, with the market reaching all-times highs, valuations are becoming somewhat distorted and value is becoming more and more hidden.
However, there is one valuation method that gives a good indication of how the stock is valued compared to the whole market and risk-free bonds, allowing for a more comprehensive evaluation.
A company’s earnings yield is calculated by dividing earnings per share for the last 12 months by its current share price. The resulting figure shows the percentage of each dollar invested in the stock that was earned by the company.
A yield that is above the market average, currently 5.1%, or above the yield on the 10-year Treasury (currently 2.47%), can indicate that the company is undervalued. This is not a certainty though, so I have used earnings yield coupled with other valuation metrics to establish a list of three companies that still look undervalued in this strong market.
Technology company SAIC, Inc. (NYSE:SAI) is currently trading with an earnings yield of 10% and looks to be undervalued compared to the rest of the market and the 10-year Treasury. Additionally, the company trades at one of the lowest valuations in the technology sector. SAIC, Inc. (NYSE:SAI) trades at a trailing-12 month P/E of 10 compared to the sector average of 20 (excluding extraordinarily high and low valuations). In addition, SAIC, Inc. (NYSE:SAI) trades at a price-to-sales ratio of 0.4, which is in the lower 13% of the technology sector’s valuation.
SAIC, Inc. (NYSE:SAI) was a victim of sequester cuts as the company’s revenue is heavily weighted to the defense industry. It is not possible to know how these cuts have affected the company until second-quarter results are out, but analysts are bearish. Wall Street analysts covering SAIC, Inc. (NYSE:SAI) have revised down EPS estimates for this year, from a high of $1.35 to around $1.14. That said, the company is expected to return to growth next year with EPS of $1.24 penciled in by analysts.
In addition, SAIC, Inc. (NYSE:SAI) offers a dividend yield of 3.4%, above that on offer from both the 10-year Treasury and the market average of 1.9%.
A banking giant
Next up is Wells Fargo & Co (NYSE:WFC), which, as the country’s largest mortgage provider is benefiting from the resurgence in housing activity. Wells is trading with an earnings yield of 8.3%, making the company look undervalued but not as undervalued as Goldman Sachs, which is trading with an earnings yield of 10%.
Wells Fargo & Co (NYSE:WFC) is one of Warren Buffett’s favorite positions and it’s easy to see why. Wells Fargo & Co (NYSE:WFC) pulled itself through the financial crisis and is now stronger and bigger than even. Indeed, thanks to Wells Fargo & Co (NYSE:WFC)’ dominance in the mortgage market, the bank is a long-term play as the majority of its mortgages last for more than 10 years. So as a long-term play, Wells Fargo & Co (NYSE:WFC) should be making money for many years to come.