It’s beginning to look like the market is settling down.
In my last article, I described four solid dividend-paying rebound candidates that had suffered relatively modest 15% to 20% losses, mostly triggered by the overall market downdraft.
Today, I’ll describe a screen for finding more traditional value plays. These are stocks that recently tripped up, typically by announcing disappointing quarterly results. Then, the weak overall market made matters worse.
I used the free stock screening program offered by FINVIZ.com (www.finfiz.com) to find candidates. I started by looking for big recent losers. Specifically, stocks that have dropped at least 30% so far this year. Of course, simply finding stocks with big price drops isn’t enough. Many will continue heading down. Thus, we must pinpoint those most likely to recover when the market rebounds. I found six worth talking about. I’ll give you the names later, but first I’ll describe my screening strategy so you can find new candidates on your own.
US Stocks Only – Not Too Small
Unlike almost everywhere else, the US economy is still in growth mode, and likely to stay that way. For that reason, I limited my list to US-based stocks. Because they are higher risk, I also ruled out very small companies. That is, stocks with market-capitalizations (value of all outstanding shares) below $300 million.
This strategy requires picking candidates that are undervalued compared to the overall market. The price/earnings ratio (P/E), which is the recent share price divided by the last 12-month’s per share earnings (EPS) is arguably the most popular valuation measure. However, I’ve found better results using the price/sales ratio (P/S), which is the recent share price divided by the last 12-months sales per share. Because quarterly sales don’t move around as much as earnings, P/S is a much steadier gauge. Undervalued stocks should be trading at price/sales ratios below two, which is the maximum value that I specified.
Low-debt stocks are always your best bets. The long-term debt/equity ratio, which compares long-term debt to shareholders equity, is a reliable debt gauge. The higher the ratio; the higher the debt. I specified a maximum 0.2 value for long-term D/E, which limits your list to very low-debt firms. Try raising that limit to 0.3 if you want to see more stocks.
Profitability ratios compare income to various measures of shareholder investment. Return on equity (ROE) compares net income to shareholder equity. Any positive ROE signals a profitable firm, but higher is better. Specify five percent or higher for ROE.
In the end, it’s earnings growth that drives share prices up. So, we want to limit our list to stocks that analysts expect to grow earnings. I specified a minimum five percent forecast for the next five years (annualized) earnings growth.
Share Price Recovery
Our best prospects are stocks with share prices have already leveled off and started back up. Also, require that passing stocks must have moved at least five percent from their lows during the last 50 trading days.
Follow the Money
Thanks to the huge trading commissions that they generate, mutual funds and other institutional investors have more access to market moving information than individual investors. But that’s not a problem. Simply requiring that institutional investors have increased their holdings over the past three months assures that we’re in sync with the big guys.
My screen turned up six candidates:
FARO Technologies, Inc. ($FARO): Makes imaging and measurement devices and software.
Francesca’s Holdings Corp ($FRAN): operates retail stores selling apparel, jewelry, accessories, and gifts.
Keurig Green Mountain Inc. ($GMCR): makes specialty coffee makers and associated products.
Ralph Lauren Corp ($RL): designs and produces fashion apparel, accessories and fragrances.
Stage Stores Inc. ($SSI): Operates 850 specialty discount department stores in 40 states. Pays dividends equating to a hefty 5.8% yield.
The Fresh Market Inc. ($TFM): Upscale grocery retailer operating more than 175 stores in 27 states.
Consider the stocks listed by this screen, or any screen for that matter, as research candidates, not a buy list. The more you know about your stocks, the better your results.
For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.
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