The Forgotten Four

The US stock market is expensive no doubt. The Buffett Indicator is flashing "Significantly Overvalued". So is the Shiller PE. According to Gurufocus data Shiller PE is 40.5% higher than the recent 20-year average of 26.7. Valuation for the S&P 500 is high because 30 per cent of the index is tech-based and most of the return has come from just 10 companies. That's a reason to be cautious but there is a value to found once we get away from the trillion dollar behemoths.

I think there is value in some large caps which are bouncing off 5 year lows. These are the recovering large caps which the bull market seems to have forgotten. I screened for companies which are at least 10 billion market cap and are trading at not more than 20%, off their 5 year lows. To ensure that these companies are on the mend, I look for quarterly growth in operating earnings. I want to see some annual growth (on trailing twelve month (TTM) basis) as well as quarterly growth in operating income. For quarterly growth I want to see at least two positive growth quarters in the last four.

Operating income, also known as operating profit or earnings before interest and taxes (EBIT), is a key financial metric that measures a company's profitability from its core business operations. It is calculated by subtracting operating expenses from total revenue, with operating expenses typically including the cost of goods sold, wages, depreciation, selling, general and administrative expenses, and research and development costs. This metric is significant as it reflects the profitability of a company's primary operations, excluding non-operational factors like interest and taxes. It also provides insights into operational efficiency and allows for standardized comparisons between companies within the same industry. While operating income focuses on operational revenues and expenses, net income includes all income and expenses, offering a more comprehensive view of a company's financial performance. Understanding both metrics is essential for assessing the effectiveness of core business operations.

Operating earnings growth is an early sign of recovering core business. It's a sign that the management team is beginning to get traction in getting the company back on track. The basic idea is for investors to get on the bandwagon early (before the rest of the market) but not too early. This way they can ride the stock as the rest of the market gets abroad.

These four large cap companies I think are worth looking at:

AMT is currently bouncing off its 5 year lows.

As a REIT, AMT is sensitive to interest rate changes. Higher interest rates can negatively impact REITs' borrowing costs and attractiveness to investors. This has caused AMT's stock to decline. However the Fed's rate hiking cycle seems to have come to an end and now rates are being cut.

The following chart shows AMT's operating income per share over the last 5 years.

The following chart shows the company's operating earnings growth on a quarterly and annual

basis. As we can see operating profit grew in all the last 4 quarters as well as annually on TTM (TTM vs. one year ago) basis. This bodes well for the company's stock price as earnings continue to improve.

Now some may argue that REITs should be evaluated on Operating Cash Flow (OCF) basis and not Operating Earnings. That is not a concern here as well as OCF per share is also trending up, nicely.

Operating income and Operating cash flow are two important financial metrics that provide different insights into a company's performance, both relating to core business operations but differing in characteristics and purposes. Operating income, also known as operating profit or Earnings Before Interest and Taxes (EBIT), represents the profit generated from a company's core business after deducting operating expenses, calculated as total revenue minus operating expenses (including cost of goods sold, depreciation, and amortization). This metric is accrual-based, meaning it includes non-cash items like depreciation, and appears on the income statement. In contrast, operating cash flow (OCF) reflects the actual cash generated by a company's normal business operations, calculated as net income plus non-cash expenses minus changes in working capital. OCF is a cash-based measure that focuses on actual cash inflows and outflows, appearing on the cash flow statement. Key differences include that operating income uses accrual accounting while OCF uses cash accounting; operating income includes non-cash expenses while OCF adds these back and adjusts for changes in working capital; and they differ in timing, with operating income recognizing revenue and expenses when earned or incurred, while OCF considers when cash is actually received or paid. Overall, while operating income measures profitability, operating cash flow assesses a company's ability to generate cash from its core operations, providing a more comprehensive view of financial health.

Becton Dickinson & Co (NYSE:BDX)Becton Dickinson and Company (NYSE:BDX) (BD) is a global medical technology company that specializes in the manufacture and sale of medical devices, reagents, and instruments. With over 125 years of experience, BD is dedicated to advancing health by enhancing medical discovery, diagnostics, and care delivery. The company offers a diverse range of products, including syringes, intravenous catheters, infusion pumps, automated medication dispensing systems, and diagnostic tools for infectious diseases and cancers. Headquartered in Franklin Lakes, New Jersey, BD employs around 75,000 people worldwide and operates in regions such as the Americas, Europe, the Middle East, Africa, and Asia-Pacific.

The company's stock appears to be bouncing off its lows.

Operating income shows an upward trend with good growth in three of the last four quarters. Forward PE ratio is reasonable at around 15.

The Estee Lauder Companies Inc (NYSE:EL)

The Estee Lauder Companies Inc. is a leading American multinational cosmetics firm based in Midtown Manhattan, New York City. Founded in 1946 by Estee Lauder and her husband Joseph, the company initially focused on four skincare products and has since grown into one of the largest cosmetics companies in the world, second only to L'Oreal. Estee Lauder manufactures, markets, and distributes a diverse range of personal care products, including makeup, skincare, fragrances, and hair care items, under a portfolio of well-known brands such as Clinique, MAC Cosmetics, La Mer, Jo Malone London, and Tom Ford Beauty. The company operates in over 135 countries and territories through various channels, including department stores, specialty retailers, beauty salons, spas, and online platforms. Since its inception, Estee Lauder has experienced significant growth through international expansion and strategic acquisitions. Today, it employs

around 63,000 people and is recognized for its commitment to quality and innovation in the beauty industry, solidifying its status as a leader in the market.

Its stock is down almost 80% from its high mainly because of weakness in its key market - China. However business appears to be stabilizing with the company eking out a small revenue growth. While quarterly operating income per share is still in a downward trend, the company has shown positive growth in 3 of the

last 4 quarters and also on a one year TTM basis. Overall it's still early days for EL but I think it's a good opportunity to pick up a premium company when its beaten down. The recent positive quarterly numbers bode well.

Alexandria Real Estate Equities Inc (NYSE:ARE)Alexandria Real Estate Equities, Inc. (NYSE: ARE) is a real estate investment trust (REIT) founded in 1994, specializing in life science and technology properties. As a pioneer in the sector, it focuses on developing and leasing office buildings and laboratories to tenants in these industries, with its properties strategically located near universities to attract top talent and foster innovation. The company boasts a total market capitalization of $34.4 billion (as of March 31, 2024) and an asset base of 74.1 million square feet across major innovation hubs such as Greater Boston, the San Francisco Bay Area, New York City, San Diego, Seattle, Maryland, and Research Triangle. Alexandria maintains an investment-grade balance sheet with strong cash flow and operates a venture capital arm, Alexandria Venture Investments, which invests in life sciences firms.

The following chart gives ARE's operational cash flow growth.

ConclusionThe four stocks profiled in this article have not had a good year. Yet they are showing signs of turning

around. Usually price lags fundamentals, in a turnaround situation.

Peter Lynch, the legendary investor, offers valuable insights on investing in turnaround stocks,

which he defines as battered, depressed, or forgotten companies often on the brink of bankruptcy and not typically considered growth stocks. He emphasizes the importance of conducting a thorough balance sheet check to ensure that the company has sufficient cash for the next 12-24 months and to assess any immediate debt obligations. Investors should understand and believe in the company's turnaround plan, looking for internal improvements such as new products, management changes, or cost-cutting measures. Lynch advises waiting for tangible evidence of the turnaround rather than buying on hope alone, as this can help mitigate risk. He notes that turnaround stocks can perform independently of general market conditions and have the potential for asymmetric returns, with a few winners capable of compensating for multiple

losers. While he typically allocated 10-20% of his fund to these stocks, he cautions that many turnarounds never materialize and stresses the need for patience as investors wait for concrete signs of improvement. By following these guidelines, investors can capitalize on unique opportunities presented by

turnaround stocks while managing associated risks.

This content was originally published on Gurufocus.com