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I'll bet dollars to doughnuts you've never heard of Lakonishok, Schliefer, and Vishny, unless you're a total investing dweeb like me. But before they founded LSV Asset Management, which now has $51 billion under management, they were obscure academics about to publish a very famous paper. Best of all, the insights they discovered can help you find stocks that will stack the odds of a successful investment in your favor. Let's check out some telecom stocks through their lens.
Turning investing upside-down
In 1994, the trio divided stocks into 10 buckets, according to earnings yield -- E/P, or the inverse of the price-to-earnings ratio, because academics prefer the exotic. LSV found that high-E/P stocks -- also known as low P/E stocks, or value stocks -- beat low-E/P, high P/E glamour stocks by 4 percentage points per year.
LSV next divided stocks into groups using a formula based on sales growth. Amazingly, they found that boring businesses with low sales growth outperformed flashy high-growth companies by 7.3 percentage points per year.
Best of all, LSV found that a portfolio combining the high-E/P and low-sales-growth approaches outperformed its opposite -- high-P/E, high-growth stocks -- by 11 percentage points per year!
I keep LSV's formula in mind every month when I'm selecting dividend stocks for my Income Investor newsletter. Let's use it right now to dig up a slow, cheap, and potentially outperforming value stock for your own consideration. I used data from Capital IQ (a unit of Standard & Poor's) to unearth companies trading at a P/E less than seven, with sales growth of less than 3% last year. Here's one that came up:
Result: Royal KPN (Pink Sheets: KKPNY.PK)
Royal KPN -- which also goes by the less melodious Koninklijke KPN (koninklijke means "royal" in Dutch) sports a sales decline from last year and a P/E of about seven, making it the closest major telecom stock I could find that would do right by this screen. Royal KPN has been showing increasing income despite soft revenues caused partially by tighter regulations in its home market (the Netherlands, if you hadn't guessed).
For some industry comparison, Vimpel (NYSE: VIP ) , telecom company operating primarily in Russia and former Russian republics like Kazakhstan, Ukraine, and Uzbekistan, sports a sales decline as well, and trades at a P/E of around 10. Mobile Telesystems (NYSE: MBT ) , which dominates Russia and many of its former states, trades at "premium" P/E of 14. Spanish-based Telefonica (NYSE: TEF ) , which has expanded from the Iberian peninsula and Latin America to places like Germany and the Czech Republic, sports a P/E of 9.6. NTT DoCoMo (NYSE: DCM ) competes in competitive, tech-thirsty Japan, where it's majority owned by telephone company NTT, and has a 12 P/E. Global giant Vodafone (Nasdaq: VOD ) -- based in England, yet far more diversified than the three above -- is priced at 9.1 times last year's earnings, which seems respectable given its growth.
While Royal KPN is the cheapest of this bunch, I can't advocate buying it -- or any stock -- blindly, but considered in light of LSV's findings, it has better-than-average odds of outperforming.
If you scan the news articles on value stocks, you'll see plenty of reasons not to invest. But according to LSV's findings, those same reasons have already driven many investors away from stocks like tightly regulated Royal KPN. Thus, a company facing headwinds can get priced so cheaply that it actually becomes a good investment. Things don't have to go exactly right; they just have to turn out better than the market expects. In short, companies with low expectations can give you the best chance to score a truly great investment.