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Jim O'Shaughnessy, member of the "Squawk Box" inaugural Portfolio Challenge, is going against the grain and buying deeply unloved international stocks, such as BP and Swiss Reinsurance, to beat the crowd.
The chairman and CEO of O'Shaughnessy Asset Management is one of the few quantitative stock pickers among the 14 in the challenge, using his firm's historical data set of more than half a century to set his analysis apart.
O'Shaughnessy relies on this long-term, empirical evidence to find his stocks and then waits for short-term market gyrations to give him attractive entry points.
His strategy this year and every year is "buying quality companies with superior valuation, momentum and yield," he said.
Here are his three picks from his firm's Enhanced Dividend Portfolio with his analysis:
- Cheaper than 90 percent of U.S. financials (It's an ADR) with P/E of 6.5 times.
- Paying a 5 percent dividend yield to shareholders.
- Steadily growing dividend since financial crisis.
- Market reacted in August to poor earnings from a decline in life and health insurance business.
- Valuations looked very cheap as they still do today, despite a 14 percent return in the market since the middle of October.
- The telecommunications company provides a wide range of mobile, fixed and broadband services to 27 million customers in Australia.
- Telstra is plowing profits into new business segments. The company enjoys a 42 percent operating margin and 15 percent profit margin on its existing businesses.The goal is to find new businesses to help offset falling margins from its profitable fixed-line business (60 percent margins).
- To do so, it's invested in less capital-intensive U.S. and Australian start-ups, Chinese Internet companies and started an e-health-care services division.
- Telstra generated $4.2 billion in net income on $23.8 billion in sales over the last 12 months.
- The company is in the top 20 percent on valuation, top one-third on "financial strength" and top 6 percent on "earnings quality."
- It trades at a P/E ratio of 14.3 times, generates returns on equity of 34 percent and yields 5.3 percent.
- Since the credit crisis, a focus on efficiency and capital discipline has taken hold. This change has driven massive shifts in capital allocation for some large energy companies. A notable example is BP, which has divested nearly $40 billion since the Macondo incident in 2010.
- The company is sizing down by selling off low-margin production and refining capacity. Operating cash flow through the first nine months of 2014 was $25 billion versus capital expenditures of $16 billion. BP is one of the few large energy integrated stocks with a positive free cash flow yield.
- The company ranks in the top 6 percent of stocks in our large stocks universe by valuation and has a P/E ratio of 13.7 times. Its EBITDA/EV yield is 20.5 percent.
- BP has returned large amounts of cash to investors via share buybacks and dividends, with $10 billion going to share buybacks since March 2013.The stock has a 5.8 percent dividend yield.
- As of the third quarter of 2014, BP increased its dividend by 5 percent. It has commitments on $4 billion of a planned $10 billion divestment campaign through 2015 and could likely reduce capital expenditures for the coming year to protect the dividend.
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