Novice Investing - 7 Stocks for 2006

Date: Thursday 20th 2008f November 2008 04:37:12 PM

7 Stocks for 2006 - 11/25/2005

By: Novice Investing Staff

Seven Stocks for 2006 is written by Michael Sivy at CNN Money and he considered seven stocks that he considered a bargain. He reasoned that the best deal in stock are likely for those that are not overly expensive. He considered seven stocks which we are going to cover one by one. The seven stocks are: Citigroup Inc. (C), General Electric Co. (GE), Home Depot Inc. (HD), Cisco Systems Inc. (CSCO), Nike Inc. (NKE), Fortune Brands Inc. (FO) and Illinois Tool Works (ITW).

What we are going to do here? We will calculate the fair value of the common stock based on the expected EPS and five years growth rate obtained at Yahoo! Finance. Then, we will compare it with current stock price and determine whether the stock is undervalued or not. Our assumption is that earning will grow until year five and then stay constant afterwards.

Citigroup Inc. (C) Current Price: $ 49.34. Citigroup is the biggest financial institution in the world with a market capitalization of $ 250 Billion. For fiscal year 2006, it is expected to earn $ 4.36 per share. Five year growth rate is expected to top 10.0%. What is the fair value of Citigroup Inc.? To be honest, this is quite difficult because it is difficult to decipher the balance sheet of a bank or insurance stock.

As of Sept 30th 2005, Citigroup has $ 588 Billion in cash & cash equivalents and $ 572 Billion of long term and short term debt. Citigroup has a positive net cash of $ 3.16 per share. For an expected earning growth of 10% for five years, Citigroup is expected to earn $ 7.02 by year five. This $ 7.02 is worth $ 5.63 in present value. In other words, Citigroup will earn $ 5.63 annually for the foreseeable future. For a 0 % growth stock, the fair P/E ratio for the stock is 13.4. Applying this ratio, Citigroup's business is worth $ 75.44 per share. Adding in the $ 3.16 per share of net cash, Citigroup stock is worth $ 78.60 per share or 59% undervalued.

We must caution that we do not know how to properly analyze Citigroup's balance sheet. Therefore, it is possible that Citigroup is not as undervalued as you think.

General Electric Co. (GE) Current Price: $ 35.94 . General Electric, too, is a tricky company to analyze. It has many divisions and its financial service, GE finance, distorts the entire balance sheet. For year 2006, it is expected to earn $ 1.99 while growth is expected to be 15.7% for the next five years. Therefore, at year five, EPS for GE will be $ 4.13 per share. The present value for that EPS is $ 3.31 per share.

Positive net cash for General Electric is $ 11.22 Billion or $ 1.06 per share. With a fair P/E value of 13.4, the fair value for GE's business is (13.4 x $3.31) = $ 44.35 per share. The fair value of GE stock price is therefore ($44.35 + $ 1.06 ) = $ 45.40 per share. From the current price, GE is undervalued by 26.3 %.

Home Depot Inc. (HD) Current Price : $ 42.50. Home Depot is the largest home improvement retailers in the United States. For fiscal year 2007, it is expected to earn $ 3.03 per share with expected 5 year earning growth rate of 13 %. Based on this information, Home Depot will earn $ 5.58 in year five. The present value of this earning is $ 4.48 per share.

As of July 31st 2005, Home Depot has $ 2.32 Billion of cash equivalents and $ 2.17 Billion of long term debt. Positive net cash for Home Depot is $ 150 Million or $ 0.07 per share. At year five, we expect Home Depot to grow earning by 0%. The fair P/E value for a 0% growth stock is 13.4. Therefore, the fair value for Home Depot's business is (13.4 x $ 4.48 ) = $ 60.03 per share. Adding in the extra cash, the fair value for Home Depot stock is $ 60.10 or 41.4% undervalued.

Cisco Systems Inc. (CSCO) Current Price: $ 17.44. Cisco Systems is the largest networking company in the world. For fiscal year 2006, earning is expected to hit $ 1.03 with five year earning growth of 15.0%. Therefore, Cisco will earn $ 2.07 per share at year five. The present value of this earning is $ 1.66.

Assuming that Cisco stops growing its earning after year five, the fair P/E value for Cisco is 13.4. Meanwhile, Cisco has $ 16.1 Billion of cash equivalents & long term investment. Long term debt is $0. The positive net cash for Cisco is therefore $ 2.57 per share. The fair value of Cisco's business is (13.4 x $ 1.66 ) = $ 22.2 per share. Meanwhile, the fair value of Cisco stock is ($ 22.2 + $ 2.57 ) = $ 24.8 per share. This implies a potential return of 42.20 %.

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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