Harry Domash's Winning Investing


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, value-priced stocks.

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.”

Low Debt
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%.”

Growth Ahead
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 those stocks.

Use the “EPS Growth Next Five Years” menu and require “Over 15%” for the next five years’ expected average annual earnings growth.

Bottomed Out
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 retail locations.

 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.


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