One method that famous fund manager Peter Lynch liked to use to search for value opportunities was to look for stocks that were trading below what their price would be if they were to trade with a price-earnings ratio of 15 or their median historical price-earnings ratio.
Ever since he detailed this method in his book “Beating the Street,” value investors have been using it as a tool to find potential investment opportunities. GuruFocus has also built the Peter Lynch chart based on this method, which is included in the summary pages of stocks to provide a quick reference.
However, not every stock trading below the intrinsic value estimates on the Peter Lynch chart is a good investment. As Lynch himself pointed out on many occasions, there is no single metric that can determine whether a stock is a buy. If a company’s business is declining, then its stock might deserve to trade lower.
In this article, we will take a look at three dividend-paying stocks in inflation-resistant sectors that are undervalued according to their Peter Lynch charts in order to determine whether or not they could provide some safety in this high-inflation environment.
OGE Energy
OGE Energy Corp. (OGE, Financial) is a public electric utility company based in Oklahoma City. It supplies gas and electricity to customers in Oklahoma and Arkansas. The utility’s energy mix is 66% natural gas, 26% coal and 8% renewable from wind and solar.
On March 24, shares of OGE Energy traded around $38.94, resulting in a price-earnings ratio of 10.62 and a dividend yield of 4.15%. The Peter Lynch chart shows the stock to be trading below both its fair value and its median historical valuation.
Utilities are considered to be relatively safe from the effects of inflation, since people aren’t likely to cut their electricity usage even when finances are tight. Moreover, these companies also operate as natural monopolies; it would be highly inefficient to have, say, two different power lines running to every house.
OGE is in the midst of a transformation plan to become a pure-play electric utility, divesting its energy businesses and focusing on growing its electricity footprint. To this end, it merged its interests in Enable Midstream Partners with Energy Transfer LP (ET, Financial) in December 2021.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10 from GuruFocus. The three-year revenue per share growth rate is 17.2%, while the three-year Ebitda per share growth rate is 14.2%. The three-year dividend growth rate is 14.2%.
Conagra Brands
Conagra Brands Inc. (CAG, Financial) is an American consumer packaged goods company based in Chicago. It primarily makes and sells products for supermarkets, restaurants and food service establishments, and its brands include Hunt’s, Birds Eye, PAM, Marie Callender’s and Healthy Choice.
On March 24, shares of Conagra Brands traded around $32.11, resulting in a price-earnings ratio of 14.11 and a dividend yield of 3.74%. The Peter Lynch chart shows the stock to be trading below both its fair value and its median historical valuation.
As a consumer packaged goods company, Conagra Brands likely won’t suffer too much from inflation. Customers are unlikely to change their spending patterns in regards to its products, especially since its prices are already on the lower end of the spectrum. Even if the costs of materials and labor increase, it can count on price increases to lift profits in the long term.
Conagra Brands has a focus on expanding its portfolio to keep up with changing consumer tastes while divesting underperforming brands, like the Peter Pan peanut butter brand it sold in the second quarter of fiscal 2022. Growth is expected to continue being slow but steady.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10 from GuruFocus. The three-year revenue per share growth rate is 5.6%, while the three-year Ebitda per share growth rate is 12.7%. The three-year dividend growth rate is 6.9%.
Industrial Logistics Properties Trust
Headquartered in Newton, Massachusetts, Industrial Logistics Properties Trust (ILPT, Financial) is a real estate investment trust that owns and leases industrial and logistics properties throughout most of the states of the U.S.
On March 24, shares of Industrial Logistics traded around $22.22, resulting in a price-to-funds from operations ratio of 9.17 and a dividend yield of 5.94%. The Peter Lynch chart shows the stock to be trading below both its fair value and its median historical valuation.
REITs have a mixed rep. On the one hand, they are popular for giving out hefty dividends, but on the other hand, they have little control over their own performance, being mostly at the mercy of the market for their assets. The good news is real estate tends to hold up very well during periods of inflation in the long term, even if there is short-term volatility.
Industrial Logistics is focused on the subset of industrial properties that are primarily used for warehouse and distribution purposes. The company believes that, since the U.S. is shifting away from in-store retail and more toward e-commerce, the value of these properties has long-term upside potential.
The company has a financial strength rating of 4 out of 10 and a profitability rating of 7 out of 10 from GuruFocus. The three-year revenue per share growth rate is 10%, while the three-year Ebitda per share growth rate is 10.9%. The three-year dividend growth rate is 12.4%.
