Color to the Numbers: Top Large-Cap Value Stocks

Thanks to the Internet and sites such as Yahoo! and MSN Money, investors have more tools than ever to search for stock ideas by running screens of stock databases. But screens often return numerous stocks that need to be weeded out because the numbers don't tell the whole story. Maybe the massive growth at one company was due to one-time tax adjustments and not core operations. Or maybe the screen didn't include the latest announcement that a dividend was canceled.

So just like the color-by-numbers books kids doodle on, the picture for stocks pulled from any screen is not clear until the appropriate color is added to the page. In this edition of "Color to the Numbers," we'll enlist Motley Fool CAPS to take a Foolish look at a screen for large-cap value stocks to see which stocks may be worth investigating further, and which should be cast aside.

Better a screen than a window
The community of knowledgeable investors who rate stocks in CAPS will help us in our search for large-cap value stocks. By pulling up a quote on a particular stock in CAPS, investors can see at a glance how the collective community rates a company today. Additionally, investors can see how the very best All-Star stock pickers -- CAPS players with a ranking above 80 -- rate a given stock. There's even pitch commentary and blogs that give details behind bull and bear opinions. This gives investors much more qualitative resources than just numbers and tables.

So let's take a look at our value screen for today and a handful of the top candidates it returned. To run this screen, we'll use the following criteria:

• Market cap of at least $5 billion.
• Price to earnings to growth (PEG) ratio of less than 1.0.
• Ratio of Enterprise Value to Free Cash Flow (EV/FCF) of less than 20.
• A forward P/E of less than 15.

This should give us the cream of the crop in terms of stocks with a strong record of performance but trading at a good price.  We'll use the PEG and EV/FCF ratios here to look for companies that have already hit stride and still have good growth opportunities ahead. The forward P/E will also help whittle the list down to those trading at low multiples of future earnings. Of course, there may be very good reasons why these companies trade at low multiples.(Hint: This is where CAPS can really help!)

Opinions with the numbers
Here's a sampling from the list of stocks our screen pulled up today.

With little surprise, our list of large-cap value stocks weighs heavily with two types of companies -- financial and insurance. This makes sense as both types of companies have a very methodical and calculated method of generating cash -- and successful institutions won't venture into areas that don't offer a predictable return.

In particular, property and casualty insurer Chubb rates very highly in the CAPS community with its five-star rating. While hurricane Katrina has many investors on edge about insurers, 98% of the best CAPS stock pickers favor Chubb to outperform the S&P going forward. The low P/E of 8.3 and yield of 2.1% (that the company recently raised again) go a long way to help counter the economic risks facing the insurance industry. Fellow insurers Hartford Financial and WR Berkeley are only slightly less favored than Chubb. Investors like the long track record of impressive results from all these insurers.

Larger brokerage and banking conglomerates such as Goldman Sachs and Merrill Lynch also show prominently on the value screen. While CAPS investors are positive on each of these companies, Goldman Sachs ranks slightly higher. CAPS bulls like Goldman's exposure to the private equity markets, which are booming, and express some distaste for Merrill's exposure to mortgages and subprime lending.  But Merrill's no slouch -- the company has shown great success lately as the thriving investment banking segment showed 47% growth in the most recent quarter.

Reality, though, is that the investment banking revenue stream could quickly slow to a trickle if markets turn sour. The large component of this segment in Merrill's business has some investors wary -- 10 of the 38 CAPS investors commenting on the company's prospects are negative.

Showing at the bottom of the list is American Airline's parent AMR, which fetches only one star from the CAPS community. While the value screen paints AMR's numbers prettier than paint provider Sherwin Williams, investors cite qualitative concerns such as high labor costs, intense competition and lack of confidence in management as reasons to give the stock the thumbs-down.

Let 29,000 investors be the judge
The collective wisdom of a huge pool of investors can quickly add color to a whitewashed page of numbers. But even with an entire community of qualified opinions acting as the judge, individual investors are still the jury and should perform their own research.

Want to see your favorite screen results run through the wringer in the CAPS community? It's free to tap the knowledge base and even give your own opinion in Motley Fool CAPS.

Another resource for finding the best value stocks is Motley Fool Inside Value. To see just how the average stock selection is beating the market by 7%, check out a free 30-day trial of the newsletter service.

Fool contributor Dave Mock does his best to color within the lines, but reserves his right to artistic expression. He owns no shares of companies mentioned here. Dave is the author of The Qualcomm Equation. The Fool's disclosure policy doesn't see color or the wart on your nose.