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number cruncher

What are we looking for?

Last week, CPMS Morningstar Canada senior consultant Craig McGee provided us with a screen of the best-valued stocks on Canada's stock market, based on a combination of valuation measures. Continuing on that theme this week, Mr. McGee has run a similar screen on U.S. stocks.

A U.S. value screen

Mr. McGee screened the S&P 500 index for the 20 highest-ranked stocks based on an equal weighting of the following valuation measures:

-Price to book value;

-Price to sales (over the latest four quarters);

-Price to cash flow (over the latest four quarters);

-Price to forecast earnings (over the next 12 months).

More about CPMS

CPMS, a division of Morningstar Canada, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers through software and Web-based tools.

It covers more than 700 Canadian and 2,200 U.S. stocks, and adjusts for unusual accounting items in each company's quarterly results to make sure screens can perform correctly.

What we found

Just as we saw in last week's Canadian value screen, the leading value stocks on the S&P 500 screen cover a wide range of market sectors – from energy to technology to consumer stocks. But perhaps most prominent on the list are financial stocks – including some very big names, such as Citigroup Inc. and Morgan Stanley. (Note, too, that Morgan Stanley makes this list despite a price-to-earnings ratio – the most commonly used valuation measure for stocks – that is far above the median for the list, and is only slightly below the financial sector's average.)

The prevalence of so many financials on the list raises the question that always comes up in value investing: Is a stock cheap for good reason? Nagging doubts about the stability and health of U.S. financial services companies have weighed down the valuation of the entire group ever since the 2008 credit crisis. Concerns about European debt exposure have hurt Morgan Stanley's credit-worthiness, while Citigroup remains saddled with billions in potentially toxic assets. They may offer great value on paper, but this is definitely a buyer-beware situation.

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