Harry Domash's Winning Investing

Four Undervalued Stocks

Recent stock market action tells us that market players might be getting around to considering fundamentals such as valuation and earnings growth prospects when picking stocks to buy.

If you’re in that camp, today I’m going to describe how you can use the free and user-friendly finviz stock screening program to find undervalued stocks with strong earnings growth prospects,  which should be a winning combination.  

Getting Started With finviz

Start from the finviz homepage (finviz.com) by selecting Screener. finviz uses “filters” to search  for stocks meeting your selection criteria. Select “All” on the Filters bar to see all available screening choices. We’ll start by defining our candidate universe.

Candidate Universe

Specify “USA” using the Country filter to limit your list to U.S.-based stocks. Next rule out the riskiest plays by specifying “Over $10” for Price, and “+Small (over $300 million)” for Market Capitalization, which is the value of all outstanding shares.

Many investors assume that low-priced stocks (below $10) offer higher profit potential than more expensive stocks, but I’ve found that the opposite is true. That is, holding higher-priced stocks typically generates higher returns than owning cheaper stocks. Same thing for market capitalizations. Holding bigger companies is typically more profitable than small firms.

Isolate Value Priced Stocks

The Price/Earnings Ratio (P/E), which is the recent share price divided by the last 12-months’ per-share earnings, is the most widely-used valuation gauge. However, per share earnings often fluctuate significantly from quarter-to-quarter. Quarterly sales, on the other hand, are usually a steadier number.

Thus, the Price/Sales (P/S) ratio which is the recent share price divided by the last 12-months sales per share, is a more reliable valuation gauge than P/E. Value-priced stocks should be trading at price/sales ratios below two, so use the “P/S” dropdown menu and specify “Under 2.

Pick Most Profitable Firms

Return on Equity (ROE), the most widely-used profitability gauge, compares a firm’s earnings to shareholders equity (assets minus liabilities). All else equal, higher ROE firms are the most to surprise on the upside at quarterly report time. Specify “Over 15%” for Return on Equity to limit your list to the best prospects.

Earnings Growth Drives Share Prices Up

Share prices typically track per-share earnings more than any other single factor. Use the EPS Growth Next Year filter and specify “Over 10%” to limit your list to firms that stock analysts expect to chalk up strong numbers in that department.

Follow the Smart Money

Institutional investors such as mutual funds and banks have access to information that we never see. Specify “Over 80%” for Institutional Ownership and “Over +5%” for Institutional Transactions to assure that these big players are still adding to already big positions in the stocks on your list.

Four Candidates

My screen turned up four candidates: Alliance Data Systems (ADS), Enova International (ENVA), International Money Express (IMXT), and Lithia Motors (LAD), Use this link to see which stocks the screen is turning up today.

Consider the stocks listed by this screen, or any screen for that matter, as research candidates, not a buy list. Do your due diligence. The more you know about your stocks, the better your results.

published 3/29/21

 

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