Finding Stocks in the Value Bin
Given the market’s big run-up so far this year,
this might be a good time to consider relatively low-risk,
These are stocks that didn’t participate in the
rally; in fact they went down instead of up. The reason: in most cases, either
the last quarter’s results, and/or forecasts for coming quarters, fell short
of market expectations.
Value investors seek out stocks in those
categories with the best chances of bouncing back in future months. However,
there’s more to finding worthwhile value candidates than simply buying
beaten-down stocks. In fact, most of those won’t recover.
Here’s how you can use the free and user friendly
stock screening program offered by FINVIZ.com to pinpoint unloved stocks with
good turnaround prospects.
Start from the FINVIZ homepage (finviz.com)
by selecting Screener. FINVIZ uses “filters” to search through the entire
market for stocks meeting your criteria. Select “All” on the Filters bar to
see all available screening choices.
The first step is to isolate beaten down stocks.
For our purposes, “beaten down” stocks are those that have dropped in price by
30% or more over the past 12-months. On FINVIZ, find the Performance filter
and use the dropdown menu to specify “Year -30%.”
While the required 30% drop is a good start, we also want to confirm that our
picks 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 is the most widely used valuation gauge. However, the forward
P/E, which uses the current fiscal year’s forecast earnings, is better suited
to our needs. Use the Forward P/E dropdown menu to select “Under 15.”
The price/sales ratio, which is the recent share
price divided by the last 12-months sales per share, is a steadier valuation
gauge than P/E because sales don’t fluctuate nearly as much as earnings.
Value-priced stocks should be trading at price/sales ratios below two, so use
the “P/S” dropdown menu to specify “Under 2.”
Regardless of your investing strategy, low-debt stocks are always your best
bets. The long-term debt/equity ratio compares long-term debt to shareholders
equity (book value). The higher the ratio; the higher the debt. Use the “LT
Debt/Equity” menu to specify “Under 0.1,” which limits the field to firms
carrying almost no debt.
Profitability, which is different than reported earnings, compares income to
shareholders’ investment. Return on equity, the most widely used profitability
gauge, is net income divided by shareholders equity. Any positive ROE signals
a profitable firm, but the higher the better. Use the “Return on Equity” menu
and require “Over 10%.”
Earnings growth drives share prices up. So, you’re best value candidates are
firms expected to resume growing earnings after they’ve solved their current
problems. We’ll use analysts’ long-term earnings growth prospects to isolate
Use the “EPS Growth Next Five Years” menu and
require “Over 15%” for the next five years’ expected average annual earnings
Since most stocks that have suffered substantial price drops are likely to
continue their losing ways, you’re best prospects are stocks that have leveled
off and started back up. Use the “52-Week High/Low” menu and specify “10% Or
More Above Low.”
Not Too Cheap
Stocks trading at exceptionally low prices are riskier than stocks trading at
higher prices. Use the “Price” menu to specify “over $10” to minimize your
risk. Lower it to $5 if you want to see more stocks.
My screen turned up four candidates. Click
here to see which stocks the screen is turning up today.
• Green Dot (GDOT):
a bank holding company, main business is marketing prepaid debit cards at
• Select Comfort
(SCSS): makes adjustable firmness mattresses that it markets via more than 400
company-owned retail stores.
• Silicon Motion
Technology (SIMO): based in Taiwan, designs and markets microchips used in
flash memory and other storage devices. Pays a 4.5% dividend yield.
• Zumiez (ZUMZ):
sells action sports apparel and footwear targeted to young men and women
through more than 500 retail Zumiez and Blue Tomato branded stores.
Value investors must be a contrarian by nature.
Value stocks are, by definition, out-of-favor with most investors and stock
analysts. That’s why they’re trading so far below year-ago highs.
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.