Two Reasonably Appealing Stock Ideas

I recently wrote about the difficulties that us value/dividend investors face in allocating capital to equities right now. The S&P 500 is up 17% YTD and we’re only a little more than five months into the year. Are many companies worth 17% more now than they were five months ago? Were many stocks 17% cheaper than they should have been five months ago? As always, it’s not really my focus to answer questions like these as at that point you’re trying to value an entire market which is impossible. I simply try to ascertain the intrinsic value of a company on a per-share basis and then see if I can purchase shares for as far under that number as possible. My overarching goal is to retire by 40 years old, and as such my mission is to build my passive income via dividends to the point where they exceed my expenses. I always try to remind myself that even in a broad market that is possibly overextended, it’s difficult to build a rising passive income stream if I’m not actively contributing to it.

Although I don’t see many companies out there trading with any significant degree of discount to their intrinsic value currently, I do see a few companies that are trading at fair values or slightly better based on fundamental quantitative analysis as well as qualitative feelings about future prospects. I’m going to discuss two potential ideas below, along with a few ancillary ideas that are similarly valued in corresponding sectors.

Exxon Mobil Corporation (XOM)

Exxon is the largest company in the world by market capitalization. It’s a massive energy company, and operates in an industry where scale and size matters. The world’s energy thirst isn’t going anywhere, and is likely only to increase as many of the most populous countries in the world, including China and India, grow their economies and many of their citizens burgeon into middle class consumers. Exxon is well placed to take advantage of these trends. One of the great things about XOM among energy companies is that it’s an integrated supermajor, meaning that they are diversified between upstream and downstream operations with exploration & production of oil and gas, as well as refining and transportation operations. This means that no one particular aspect of energy will have an overwhelming effect on the business. They can continue to profit from refining when oil prices are lower, and in contrast can benefit on the E&P side when oil prices are up.

Exxon currently trades for a P/E of 9.36 and shares offer an entry yield of 2.75%. This entry yield, while not spectacular, is solid in this market. The yield is backed by 31 years of dividend growth, with a 10-year dividend growth rate of 9%. The balance sheet is almost flawless, cash flows are very strong and earnings have been crowing at a very attractive clip of 13.31% compounded annually over the last 10 years from 2003-2012.While XOM is a suitable investment at current prices, Chevron Corporation (CVX) would also make a great alternative here. Currently, XOM trades near the low end of its 5-year low P/E ratio. Overall, I find XOM to be reasonably appealing at current prices at just under $92 per share. The payout ratio stands at 25.6%, so there’s plenty of room for continued dividend growth.

Some current analyst opinions on the valuation of XOM:

*Morningstar rates XOM as a 4/5 star valuation with a Fair Value estimate of $97.00.
*S&P rates XOM as a 5/5 star Strong Buy with a Fair Value calculation of 93.50.

The Bank of Nova Scotia (BNS)

I wrote about why I was bullish on certain Canadian companies a couple months ago, and why I particularly liked a few of the big Canadian banks. Just after the article went live I purchased equity stakes in two of the larger Canadian banks: BNS and Toronoto-Dominion Bank (TD). I still really like these banks and am almost evenly split between the two. I find them almost equally appealing in different ways, but I simply picked BNS here because of their international exposure. Taking that a step further, I also like Royal Bank of Canada (RY) in this space. Most of the big Canadian banks are very high quality banks that held up very well in the recent financial crisis. Although the share prices of these banks cratered in late 2008 along with the rest of the market, operations continued to hum along fairly normally and dividends weren’t cut. Since I initiated positions with TD and BNS the share prices have been fairly static, underperforming the U.S. market by a large margin. This allows for an opportunity to purchase shares at the same levels they were trading at months ago. A further note: I really like Wells Fargo & Company (WFC), and although shares have participated in the S&P 500 rally this is a high quality bank trading at a reasonable valuation based on future growth prospects.

BNS shares are trading hands with a P/E of 11.15. The entry yield is very solid at 4.14%, so shares in this bank offer one of the better opportunities for current income in a stretched market. The dividend growth is solid, just as the growth in earnings are. Although they kept the dividend payout static during the economic crisis, they’ve raised the dividend twice over the last year for a total of 9.1% growth in the dividend year-over-year. EPS growth has averaged a compound annual growth rate 12.72% over the last 10 years. BNS has an attractive balance sheet and most of its operations are in a very stable Canadian economy. There are some near-term headwinds with a very expensive Canadian housing market, but long-term the big Canadian banks look pretty solid as they function largely as an oligopoly. The payout ratio is at a very healthy 46%, so further dividend growth is highly likely. Overall, BNS appears to be reasonably priced here at just over $57 per share.

Some current analyst opinions on the valuation of BNS:

*Morningstar rates BNS as a 3/5 star valuation with a Fair Valuation estimate of $61.00.
*S&P rates BNS as a 4/5 star Buy with a Fair Value calculation of $63.90.

In summary, while I think the broad market is a bit pricey based on a number of different metrics (Shiller P/E being the most prominent), I remain vigilant on valuing individual companies based on company-specific merits and fundamentals. I view the two companies discussed in this article, along with the four other ancillary ideas mentioned, to be reasonably appealing stocks based on their current price and that relationship to their intrinsic values on a per-share basis. While I’m not crazy about the current market and I’m currently building my cash position, I do have an interest in acquiring equity stakes in the companies mentioned in this article at today’s prices. They are all high quality businesses trading for valuations that aren’t completely out of line.

Full Disclosure: Long CVX, BNS, TD, WFC

How about you? Find any of the companies mentioned reasonably valued?

Thanks for reading.

Photo Credit: Freelart/


  1. Black Gold says

    DM, curious to hear what you think of BP. Obviously due to the dividend cut after the spill it’s not a dividend champion, but I view that as such a freak one-time event as to potentially merit overlooking. It seems to me the market is still dramatically undervaluing BP (P/E 6.15, Yield 4.9%) and in particular it hasn’t seen the same (unwarranted) growth these past few months as the larger market. What are your thoughts?

    • says

      Black Gold,

      Hmm, I haven’t taken a look at BP in a while due to the ongoing litigation. I just quickly reviewed some of the litigation results thus far and it hasn’t been too bad. However, they are still in the middle of a civil trial against the DOJ. With these kinds of clouds overhead I would probably stay away from BP, but I could change my mind on that. As always, the best time to invest in a stock is when trouble is brewing and certainly there is still some trouble brewing around BP. However, it looks like most of it is behind them after a few settlements. It also appears that a settlement could possibly be reached in the civil trial that will be far below what BP has set aside.

      It’s definitely one to watch.

      Thanks for dropping by and I appreciate your thoughts on BP!

      Best wishes.

  2. says

    I’ve been following your blog from the sidelines since about six months after inception and I’m just now ready to throw my hat in the ring and document my own journey.

    In regards to the post, I’m very long the banking sector right now. I hold BMO, TD, BAC, JPM, WFC, USB, SAN, BBVA, BMTC, HBAN, SNV, and PBCT. It’s a very random list, but I was fortunate to start DRIPing many of them at the end of 2008, so I’ve built up some decent gains thus far.

    My most recent contributions in the past six months have been going in to BAC, AIG, HIG, and SAN. I especially like the AIG and HIG warrants. I know that these companies don’t necessarily fit into your long term vision, but I thought I’d respond in order to provide a different perspective. Best wishes!

    • Larry says

      Do let us know if you start a blog, I’d love to see your progress. I find blogs like these quite the inspiration. That’s a lot of banking stocks! Are you overweight on these stocks right now or are you diversified ? I just picked up some PBCT myself. :-)


    • says

      Goosemann Jones,

      Thanks for stopping by!

      That’s a lot of banks there! There are some I recognize and some I do not. One that you have that I have been interested in is USB. That is one I don’t own yet, but that could change in the future.

      Best of luck on your blog and future investments!

      Take care.

  3. Spoonman says

    Thanks for the suggestions.

    In the past I was able to grow my dividend portfolio “vertically”, i.e. add to existing positions and rarely add to new positions. With the current high valuations, I’ve been forced to grow my portfolio “horizontally/laterally”, i.e. by adding to new positions. It’s a tough situation because the more positions you have the more time you have to devote to monitoring the portfolio (which ain’t much since these companies are so superb, but still).

    I will be adding to my XOM position soon.

    • says


      It’s tough right now to really find compelling opportunities. I’ve moved from trying to find compelling ideas to trying to find reasonable ideas. That’s the only way I can rationalize investing fresh capital right now. Certainly not the best position to be in, as I would prefer a large margin of safety but that is the situation we find ourselves in. I’m still holding my cash, but a couple large market drops in a row could change that.

      I hear you on not wanting to hold too many stakes at which point it becomes time consuming to keep up with. I hope that by the time I’m having a hard time managing my portfolio I’ll be transitioning into a situation where I’m not working full-time anymore and it’ll be much easier. The timing will be difficult.

      Best of luck out there!

      Take care.

  4. says

    DM, thanks for sharing those stocks for my next review. I’ve been on a hunt for undervalued and fairly valued stocks as well and it is hard to find them these days. Besides those you mentioned I see LO as another fairly valued stocks and some REITs (e.g. AGNC), but that’s it. I’ll review your tips and see if I will be adding. But mostly these days I am piling cash. If the market really gets into a serious correction, I will need cash to back up my margin trades so I won’t get hit with margin calls (and with pants down). And I smell the correction around, just not knowing when it hits us.

    • says


      I like LO. I already have a full allocation to that particular company right now so I’m not interested in adding. That’s a great tobacco company, however. You don’t run across a stable and rising 5% entry yield every day.

      You definitely want to have a little cash on hand if the market drops and you get hit with margin calls. Don’t want to get in trouble by being undercapitalized at a bad time. That’s how a lot of people got in trouble in 2008-2009.

      Best regards!

  5. Onassis says

    Dear Jason,

    I have make a “Payback Time” analysis from XOM and CVX (the shorter, the better):
    Payback Time CVX: 6,6 years
    Payback Time XOM: 7,3 years

    Average growth (earnings, book value, cash flow and sales) (the bigger, the better):
    CVX: 12% p.a.
    XOM 8%. p.a.

    If I have to decide between these two companies, I prefer CVX!

    Best regards

    • says


      Chevron is a very high quality oil company. I’m long CVX already and both of them are fairly reasonable investments at current prices. I listed XOM because I currently do not own it and it has underperformed CVX by a large margin YTD.

      You probably can’t go wrong either way! :)

      Best wishes.

  6. says


    I recently added XOM, I was always hesitant to buy because of the relatively low dividend for an oil major. But I think they have positioned themselves for future growth in natural gas with the purchase of XTO a couple of years ago. I am fairly certain XOM will be around and growing the dividend when I am 100 years old.

    • says

      Second Half,

      Exxon is a great company. Hard to go wrong owning a piece of the largest company in the world. The XTO purchase was unfortunate in the timing, but certainly could be great over the long haul as it’s a big bet on domestic gas.

      Exxon is definitely one of those stocks that you can safely tuck away and plan on collecting dividends for many decades to come. That’s exactly what I’m looking for! :)

      Best regards.

  7. says


    I really want to get some XOM exposure but the yield has always kept me from doing so. If it dips back down to around $87-88 I’d be interested and would probably pick up some shares. Almost every company I want to buy is too high right now which is a shame because I have a big chunk of capital I’m ready to deploy. Deploying the capital is going to be tough though to avoid being like the high school teenage boy on prom night. Premature!

    • says


      It’s very tough to deploy capital right now. There are some opportunities (like the ones mentioned above, among others) that are more reasonable than others, but I don’t see much that is particular exciting or compelling. Usually I’m very excited to buy stocks and have a hard time holding on to cash. Right now I find that mood completely the opposite as I’m not excited at all by the idea of buying stocks. We’ll see what happens before the end of the month. I’m hoping for a couple solid pullbacks in some of the names above and others which would get me a bit excited again.

      Happy shopping!

      Best wishes.

  8. says

    Exxon seems like an interesting company. With their long history of dividends and a decent growth rate over the past ten years it seems like they would be a good buy. I tend to stick with mutual funds, so I don’t do a ton of researching on individual companies.

    • says


      Exxon is one of those companies that is a fairly stable, and safe company. For many, it’s a core holding. It was a core holding of mine for years until I sold it after a run-up. I regret that move a bit, but it worked out for the best as the companies I purchased with the capital from the sale (UNS and AVA) worked out much better than if I had held XOM. I am highly interested in becoming a shareholder once again though.

      Best regards!

  9. says

    Another great analysis, DM. Totally agree on your perspective on the overall market. It’s an interesting era where one has to turn over a ton of rocks to find something good. Totally different than the old days where you could just run some filters and have too many choices to pick from.

    • says

      Pretired Nick,

      It’s definitely an interesting era right now, and a rather unfortunate one for those of us who are net buyers and looking to grow wealth. A wealth accumulator is certainly in a much worse spot than someone who has already accumulated wealth and is now living off their assets. All depends on your perspective.

      I can’t imagine that we don’t have a mild broad market pullback in the next couple months. However, I could be totally off base and it runs up another 10% from here. You never know. I plan on continuing to do what I’ve always done: buy quality at the most attractive price I can find.

      Best wishes.

  10. says

    Very nice analysis. I was an owner of CVX last year and had a pretty good run. I agree that even though the S&P is up there are still some good opportunities for purchases out there.

    • says


      Thanks for stopping by.

      I agree with you. The S&P 500 has certainly been on an epic run, but that doesn’t mean that everything across the board is overpriced. As always, individual companies are priced differently and some has performed better than others YTD. I think some of the companies that I listed above offer fairly reasonable opportunities. For instance, BNS is up only a little over 2% YTD. So that has underperformed by a large margin.

      Best regards!

    • says


      You nailed it there. I listed XOM over CVX because of personal diversification. However, it’s not just personal. XOM has underperformed CVX YTD by a fairly large margin, so I believe there is a fairly reasonable opportunity there. Both are priced at a level that is fairly attractive relative to the general market, however, so either would be a great investment here in my opinion. Certainly anything can happen in the short-term and both are obviously exposed to the price of oil, but I think looking out over the long-term both should work out well for an investor.

      Take care!

  11. Larry says

    I like both XOM and CVX , this week I was actually going to buy CVX but I just missed the ex-dividend date (I bought LO instead) so it’ll have to wait till next quarter at least. Like you said everything looks solid for continued dividend growth I agree 100%, no debt, big earnings,amazing dividend growth, low payout ratio, my one criticism might be their revenue growth has seemed to stall but I suspect that’s temporary.


    • says


      Revenue growth has not been overly impressive with some of the oil majors, but even with minor core growth they both can do well over a substantial period of time due to earnings growth via share buybacks and delivering shareholder return through dividends.

      I bought LO a little while back and I’m now fully allocated to that particular company, but certainly the yield and valuation is compelling here. One of the better opportunities out there if you are confident that menthol isn’t going anywhere.

      Best wishes!

    • Steve says


      How do you determine when you are “fully allocated” in a company? I tend to use rough percentages of my overall portfolio but I also tend to evaluate the potential risk in a company. For example, I see much more risk in INTC than in PG so I tend to limit my exposure to INTC to a greater degree. I’d be interested in hearing your method.


    • says


      Thanks for the question.

      I also use a percentage of my portfolio. The total number of positions I’m eventually looking to manage is 40-45. So at that point, I’d be looking at 2.5% allocations to each company if I was managing 40 positions and each one was equally weighted. Obviously I’m still building my portfolio on an active basis, so the weights aren’t as equal as I’d like…but I’m aiming to come close to something like that eventually.

      Getting to the quality side of things, certainly some companies are inherently “safer” than other companies due to the secular nature of their businesses. So a PG or KO would be a “safer” bet than an INTC, and due to such the weightings of consumer and industrial stocks would probably be higher than financial and tech stocks for instance. So, I’d be looking at, say 3-3.5% weightings for secular consumer stocks and maybe 2% or so weightings for riskier equity stakes.

      I hope that helps? That was a bit long winded. Basically, my portfolio is still being built so it’s not an exact model for what I’m ultimately trying to accomplish, but certainly I would put LO into a riskier category because it lacks international exposure, relies too much on one product (Newport menthol) and also operates in an industry that faces constant regulation and litigation. It also operates in an industry that is in a secular decline. So LO, for me, is definitely fully allocated as I’d like my position to be closer to maybe 2% or so.

      Best wishes!

    • says


      Thanks for stopping by!

      I’m long BNS. I really like that bank. I’m currently thinking about adding to my position. I think that Canadian banks are attractively valued here. They have gone nowhere YTD for the most part and the yields and valuations offer some of the better opportunities that are out there. I also like TD and RY here.

      Hope all is well!

      Best regards.

  12. says

    I really like BNS and I’ve been a shareholder for about 2 years now. The stock hasn’t go anywhere yet but I believe in its potential over the long haul. BNS is the most international Canadian bank and it will benefit from a bounce back in the economy while being less at risk of a mortgage collapse in Canada.

    • says


      Thanks for your thoughts on BNS.

      You’re right, the stock price has gone nowhere over the last couple years. But an investor has still been collecting fairly substantial dividend checks and have had the opportunity of reinvesting them back into a relatively stable stock price. Better than some of us U.S. investors facing stock prices that are climbing a beanstalk! :)

      I wouldn’t mind buying some more BNS or TD here. RY is also on my watch list. I agree that the international exposure that BNS has is particularly attractive due to the potential headwind of a sudden decline in housing prices. There are some that believe that Canada is in the midst of a housing bubble and I think there are potentially signs of such. Regardless, these are investments for decades, not for the next 3-5 years.

      Best wishes!

  13. says

    Nice article. If I had to make another purchase this month it would be BNS or TD. I think exchange rates are also playing a part in the reasonable stock prices. I own a different Canadian company that pays monthly dividends making it easy to see currency fluctuations month to month. The May payment was the lowest in quite a while. While I do not like my dividends being lower, the rate does provide better entry prices for new purchases. It’s good and bad at the same time!

    • says

      Compounding Income,

      Great thoughts there on the exchange rate between the dollar and the loonie. I’m sure that certainly plays a role, certainly between the USA and TSE listed versions as you can see the U.S. listed shares underperforming their Canadian counterparts for the most part over the last few months. However, even the TSE listed shares haven’t been doing very well. TD and BNS, for instance, have been fairly flat on both exchanges. I think that’s because they rebounded so strongly after the crisis because they were well capitalized and didn’t face the troubles that our banks did. They bounced back so quickly that there wasn’t much more room for further share price advancement. At least that’s the way it seems to me.

      I think most of the Canadian banks offer some decent value in this market because of their relatively static share prices over the last couple years while the businesses have continued robust operations.

      Best regards!

  14. says

    A nice pair of ideas. I would like to add XOM to my portfolio at some point to complement CVX and spread out my risk among the oil majors. It looks like XOM might be stepping up its dividend growth a bit, with a 21% increase last year and a 10.5% increase this year (compared with single-digit percent increases in previous years). I hope the trend continues.

    I have been helping a Canadian relative with a stock portfolio that she recently gained control over following her divorce. The portfolio was previously managed by her ex-husband, who was clearly a yield chaser and didn’t give much thought to diversification across sectors (2/3 of the portfolio is in just two stocks). After cleaning up the portfolio a bit by selling off some bad stocks, I had her start a position in TD. However, all the big Canadian banks seem to be decent investments.

    • says


      I’m with you. I also hope XOM continues the rather strong dividend growth. One of the big reasons I sold it last year was because the dividend growth was rather unspectacular while the entry yield wasn’t particularly appealing either. Right after I sold they came out with a monster raise. Funny how that happens.

      I think all of the Canadian banks offer some relative value here, specifically BNS, TD and RY. However, the headwind of highly elevated prices on Canadian housing continue to provide a fuzzy picture on the future growth/results of many of these banks. I prefer the banks that offer some international exposure, and BNS is the best in this regard. TD is right there as well with strong U.S. operations.

      You couldn’t have picked a better time to sit out! Hope all is going well with the upcoming transition!

      Best wishes.

  15. gibor says

    I hold all 6 big Canadian banks and imho it’s a good investment at current prices…My allocation to banks is close to 18- 20% , so I’m a bit uncomfortable to add more….in last couple of months I added only to my NA position and mostly because I want to be able to DRIP at least 1 share.
    Regarding CVX …. just last week I was thinking about initiating position :)
    I hold already COP for several years (+ PSX from spin off), just wanted a little more diversification in this industry on NYSE…..

    • says


      Thanks for stopping by.

      You have a fairly large allocation to banks. I certainly do not blame you for not wanting to add any more, as 20% is already fairly high.

      I hold CVX, COP and PSX and all have treated me very well. I had XOM for a couple years and it also treated me very well. I turned the capital from that sale into even more wealth after the purchase/sale of UNS and the purchase of AVA. However, I do find myself wishing to be a shareholder in Exxon one again.

      Happy hunting out there! Hopefully we get a mild correction soon.

      Best regards!

    • says


      Nice article there. It feels good knowing this company was originally part of the great Standard Oil. That’s some history there.

      I like XOM. Certainly I’d like it in the mid-$80’s much better, but we’ll see what we get.

      Take care!

    • says


      Great article. Always enjoy Tim’s stuff. I read that just the other day. I see he’s quite bullish on the majors, as am I. I don’t think the valuations are overly compelling, but there is still some value there if you’re in it for the long haul. Oil can certainly go either way in the short-term, but I think energy demands will only increase worldwide, only to be partially offset by increases in efficiency.

      Best wishes.

    • gibor says

      Jason, I want to initiate position in CVX on small pullback…. when yield will be close to 3.25-3.3% and for long term it should be fine as I hardly believe such companies gonna cut dividends….

  16. Anonymous says

    cant go wrong with oil stocks i like cop do you ever look at pipeline mlps because of the yield

  17. says

    I have picked up BP and Cisco not so long ago. I find both of them to be compelling value right now. Interestingly, Morningstar has a rating of 4 stars on Coca Cola at the moment, with a fair value estimate of $45. I don’t believe its a compelling bargain at this time, but if it happens to drop 10% from here, I’ll be tempted to take another look. Along with MCD, its one of the stocks on my hold forever list

    • says


      Nice buys there. I keep going back and forth on BP. I’m just a little unsure about it with the fact that the litigation is not yet over regarding the spill. Cisco is one on my list. I was highly interested, and then it had a post-earnings pop.

      Interesting KO is rated 4 stars by M*. It wasn’t that way last I looked, so I’m guessing they raised the fair value estimate somewhat recently. I suppose it depends on how you value it, but I did a DDM back in January when I purchased shares below $38 per share and I got a fair value of about $37 or so per share using a 10% discount rate and a 7% long-term growth rate. I think $44 is pushing it a bit here, but obviously you have to take into account the fact that Coca-Cola is an extremely high quality company.

      I agree with you that KO is one of those hold forever stocks, unless something dramatically changes with the company.

      Best regards!

  18. says

    Canadian bank stocks have been treading water for a number of reasons. First of all, they are extremely exposed to the Canadian real estate market. There are concerns in Canada about the health of the domestic real estate market so there is that overhang. The second issue is the embedded foreign exchange risk in the Canadian dollars versus US dollars. You are taking a view on the currency once you buy the stocks unless you hedge it back into US dollars if you live in the United States. Last but not least is that Canadian economic growth has been slowing so the banks have had limited room to grow over the short term in terms of adding new assets. So for the last five years the banks have been “dead money”. I live in Canada so I see it on the ground. Before 2008 Canadian bank stocks were a simple decision. Buy. Since that time….. In addition, Bank of Nova Scotia or Scotiabank as we call it is heavily exposed to Latin America. They have been superb at managing this risk to date, but you should have a thorough read of the Annual Report to make sure you are comfortable with the risk. TD Canada Trust has substantial operations (branches) in the US (Florida has a lot of them). Canadian banks have not fared well historically in the US for an extended period of time. Like all investing, investigate before you invest and make sure you are aware of and comfortable with the risks.

    • says


      Thanks for stopping by and offering a Canadian perspective on the banks.

      I agree with you on the housing situation there. There are concerns about the Canadian housing market, and for good reason. It’s now one of the most expensive in the world, and by many measures it appears to be in a bubble. As always, focusing on the banks with diversification away from this is key. That’s why I really like BNS and TD. Certainly there are risks with any company, and so knowing those risks and making sure you are comfortable with them is key. Currency risk is there, but that goes both ways.

      Overall, I’m comfortable owning a small piece of BNS and TD, and am also considering RY. I wouldn’t want to make any of them a core piece of my portfolio, and that really goes for most banks because of the risks (some you pointed out). But I still feel that they have a place in my portfolio at the right price.

      Best wishes!

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