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A Better Way to Find Value Stocks

With the market sputtering, this is a good time to consider value-priced stocks. These are stocks with strong fundamental outlooks, but trading at bargain prices. They are usually former high-fliers that reported sales and/or earnings numbers below market expectations, inciting growth investors to bail out. 

Coincidentally, Zacks Research (www.zacks.com) recently added a new tool to its free stock screener that could help us spot better value candidates.

Zacks has been in the business of figuring what works and what doesn’t, in terms of picking winning stocks for years. However, until recently, Zacks had mostly confined its research to analyzing stock analyst’s actions. That is, figuring out how to use changes in analyst buy/sell ratings and earnings forecasts to predict future stock market action. While useful for implementing growth stock strategies, Zacks’ tools weren’t particularly useful for selecting value candidates.

New Way to Pinpoint Value Candidates
However, Zacks’ new Value Score screening parameter takes a new approach to identifying value candidates. Instead of looking at valuation ratios, it employs a proprietary formula to pinpoint stocks that are undervalued compared to their future earnings growth prospects. Scores range from “A” to “F” with the usual meanings. Here’s how to use the score to find value candidates.

Finding Value
Start by selecting "Screening Menu" and thenStock Screener” from Zacks homepage. From there, you could select a Category, such as EPS Estimates, to see the screening choices available for that category. However, everything we’ll need is in the “Popular Criteria” category, which comes up automatically when you select the screener.  

Start by specifying “Value Score = A” and then selecting “Add” to add that screening requirement. Next, to limit our lists to stocks already on the move, we’ll require that analysts had recently (last four weeks) increased their earnings forecasts by at least five percent. Do that by entering 5 (>=5) for the minimum value of the parameter oddly labeled “% Change F1 Est (4 weeks).” Then require a minimum $500 million (>= 500) market capitalization (value of all outstanding shares).

Because value strategies often take some time to play out, we’ll focus on candidates paying significant dividends. That way, we’ll receive income while waiting for the market to discover our stocks. Enter three percent (>= 3) for Dividend Yield Percentage. Delete or reduce that requirement if you want to see more stocks.

The List
My screen turned up six candidates, not surprisingly, all energy-related stocks.

Alon USA Partners (ALDW): A master limited partnership (MLP), Alon operates a crude oil refinery in Texas. Dividend yield is 11.1 percent.

HollyFrontier (HFC): Owns and operates five oil refineries in five different states. Yield 3.6 percent.

PBF Energy (PBF): Owns and operates three oil refineries, one in Ohio, and two in New Jersey. Yield 3.7 percent.

PetroChina ADR (PTR): A major oil company headquartered in China. Yield 5.1 percent.

Sunoco (SUN): An MLP that distributes refined products to convenience stores and other dealers in 26 states. Yield 3.1 percent.

Targa Resources (TRGP): Through its subsidiaries, owns natural gas pipelines and associated facilities mainly in the Gulf Coast states. Yield 3.3 percent.

For diversification purposes, limit your purchases to only one of the three refining only companies listed.

published 4/3/15

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