That Won't Go Broke
Holding a stock that files for bankruptcy usually means
that you’ll end up losing your entire investment. In fact, even rumors
that one of your stocks might go under could ruin your day.
Thus, it’s always a good idea to confine your investing
to financially solid firms that won’t buckle if our economy takes an
unexpected dive. I call them “bulletproof stocks.”
I described such a strategy for identifying such stocks a
couple of years ago, but today, I’m
tweaking it somewhat and
adding a test to rule out stocks in long-term declining
Screen for Finding Bulletproof Stocks
As is often the case, I’ll demonstrate the process using the
user-friendly Finviz stock screener. From the Finviz home page (finviz.com),
start by selecting
and then, on the Filters bar, click on All to see all available
screening filters. Use the adjacent dropdown menu to select a value for
each filter that you want to use in the screen.
Since the U.S. economy is by far the strongest, start by using the
Country filter to specify U.S.-based stocks.
& Lots of Cash
Then, limit your list to low-debt stocks by specifying “under 0.3” for
debt/equity ratio (D/E), which compares total debt to shareholders
equity (book value). Firms with no debt would have zero D/E and the
higher the ratio, the higher the debt. While specifying zero D/E sounds
tempting, in fact, almost all firms carry some debt.
Next, limit your list to cash rich firms by specifying “Over 2” for
Quick Ratio, which requires that a passing firm’s readily available cash
is a least double its current liabilities.
Then we’ll check free cash flow to rule out stocks that are draining
their cash reserves to fund operations. We’ll do that by checking free
cash flow, which measures the cash remaining after funding current
operations and making the investments required to remain competitive.
For this test, the amount doesn’t matter; we’re only confirming that
cash is flowing in, not out. Since Finviz doesn’t have a free cash flow
filter, specify “Over 5” for the Price/Free Cash Flow ratio, which could
only be positive if cash flow is positive. As a check, also require
“Positive” for profitability measure Return on Equity, which assures
that passing firms are reporting positive net income.
Out Riskiest Bets
Cheap stocks get that way because market players see problems ahead.
Avoid them by specifying “Over $10” for price.
Firms that are in declining industries, such as retail, for instance,
could pass all of our tests, but still face future financial problems.
Specify “Positive” for “Sales Growth Past Five Years” to minimize that
BulletProof Stock List
When I ran the screen, Finviz listed 132 Bulletproof Stocks. Click on
Market Cap (value of outstanding shares) to sort the list by company
size with the largest companies first. By that measure, the top five
Bulletproof stocks were Alphabet (GOOGL), Facebook (FB), Nike (NKE),
Adobe Systems (ADBE) and Regeneron Pharmaceuticals (REGN).
here to see which stocks the screen is turning up today.
Qualifying as bulletproof means that a stock isn’t a bankruptcy
candidate, not that you’ll make money owning it. You still have to do
your due diligence. The more you know about your stocks, the better your