Despite the recent market bumpiness, many stocks are
still trading substantially above their year-ago prices, and
arguably, many are still overvalued.
Screen for Overlooked Stocks
So, what to buy now? Here’s a screen for finding
fundamentally solid stocks that missed last year’s rally, but are
now showing signs of life? As often the case, I’ll use the free
FINVIZ stock screener (finviz.com)
to demonstrate the process.
Start by selecting “screener” on the FINVIZ
home page, and once
there, check “All” on the Filters menu to see the menu of selection
filters available to search for stocks meeting your requirements.
For each filter that you want to add, use the associated dropdown
menu to select search values.
Overlooked Stocks Universe
We’ll start by isolating stocks that didn’t move up much in share
price since last May, when the rally started. We can do that by
limiting our picks to stocks trading below their long-term (200-day)
moving average. If you’re rusty on your stock market terms, the
moving average is the average closing price of a stock over a
specified period, in this case, 200 market days, which translates to
around 41 weeks. Do that by using the 200-Day Moving Average Filter
dropdown menu to select “Price Below SMA.” When I ran the screen,
more than 3,900 stocks met that requirement.
Next, we’ll pinpoint the stocks from that group that have recently
begun a turnaround. You can do that by using the Performance filter
and selecting “Month Up” to pinpoint stocks that have moved up in
share price over the past month. Adding this requirement cut our
list down to around 1,500 beaten down, but starting a turnaround
Now, limit your list to members of the S&P 500 index. These are
large-cap, fundamentally-solid stocks selected for their
consistently solid earnings growth track records. Do that by using
the Index filter to select “S&P 500.” Adding that filter cut our
candidate list down to around 100 candidates.
Finally, we’ll add two fundamental checks to isolate the strongest
candidates from that list, starting with profitability.
Profitability, more than simple earnings per share, measures how
efficiently a firm employs its assets to generate those earnings.
Return on Equity (ROE), the most widely-used profitability gauge,
compares earnings to shareholders’ equity. Any positive value says a
company has been profitable over the past 12-months, but higher is
better. Specify ROE “over 10%” using the Return on Equity filter to
isolate your list to only the most profitable candidates.
You always do better by avoiding high-debt stocks. So, continuing
the fundamentally strongest theme, we’ll use the Debt/Equity ratio,
which compares total debt to “shareholders equity” (book value) to
rule out debt-laden stocks. D/E ratios start at zero and the higher
the ratio, the higher the debt. However, almost all companies carry
some incidental debt. So, using the Debt/Equity filter, specify
“Under 2.0,” which rules out all stocks carrying significant debt.
Four Fundamentally Strong, But Overlooked Stocks
My screen turned up four fundamentally strong stocks that missed
last year’s rally but are now showing signs of life::
• Cerner (CERN): Healthcare
• Chipotle Mexican Grill (CMG):
• Fortune Brands Home & Security (FBHS):
Home &Security Products
• Regeneron Pharmaceuticals (REGN):
here to see which stocks the screen is turning up today.
As always, consider stocks listed by a screen to be research
candidates, not a “buy” list. The more you know about your stocks,
the better your results.