Repsol (REP): A 'Peter Lynch' play?

In his always-fascinating Validea newsletter, John Reese assesses stocks based on the investment criteria used by numerous "legendary" investors.

For a recent new recommendation, he explains, "Repsol (NYSE: REP), the Spain-based integrated oil company, gets approval from my Guru Strategies based on both Peter Lynch and James O'Shaughnessy."

"My Lynch-based model considers Repsol to be a "stalwart", because of its high annual sales of $87.2 billion and moderate 12.09% growth rate (based on the average of the three-, four-, and five-year earnings per share figures). 

"Lynch typically kept a few stalwarts in his portfolio at all times because they provide protection during down times or recessions. Respol operates in more than 30 countries. In terms of assets, it is the largest private energy company in Latin America.

"To find growth stocks still selling at a good price, Lynch used the P/E/Growth ratio, which divides a stock's price/earnings ratio by its historical growth rate. Because dividends are often one of the reasons people invest in stalwart-type companies, Lynch adjusted the P/E/G ratio for yield when looking at stalwarts. 

"Yield-adjusted P/E/Gs under 1.0 are acceptable to my Lynch-based model, with those under 0.5 the best case. Repsol has a yield-adjusted P/E/G of 0.61, passing the test and indicating that the stock is a good buy at its current price. 

"Lynch liked companies to be conservatively financed, and to assess this he usually used the debt/equity ratio. My Lynch-based model calls for stocks to have debt/equity ratios less than 80%; at 64.03%, Repsol passes the test.

"My O'Shaughnessy-based model, meanwhile, considers Repsol a value stock. When looking for value plays, O'Shaughnessy compared a company to the market average in a number of areas, one of which was cash flow per share. 

"The model I base on his writings calls for companies to have cash flows per share greater than the market mean, which is currently $1.39. Repsol's cash flow per share of $8.30 is almost six times that, passing this test with flying colors.

"O'Shaughnessy targeted large, well-known companies when searching for value stocks, so he looked at market cap and the number of outstanding shares that a stock had. My O'Shaughnessy-based value model requires companies to have a market cap of at least $1 billion, and more outstanding shares than the market average.

"Repsol's $47.7 billion cap easily passes the first test, while its 1.22 billion shares outstanding almost double the market average of 622 million, passing the second test.

"O'Shaughnessy also sought out firms with high sales when looking for value plays, and my model requires a company's sales to be at least 1.5 times the market mean. With sales of $87.2 billion, Repsol has done almost five times the market mean of $18.8 billion in sales over the trailing 12 months. 

"Finally, O'Shaughnessy takes all of the companies that meet the four aforementioned criteria and ranks them according to dividend yield, with the top 50 passing his dividend test. Repsol's dividend yield, 3.69%, is in the top 50, so it passes this final test."