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What Works-Putting It All Together

In earlier columns I’ve reported the results of my research regarding ‘what’s working now’ and ‘what isn’t working’ in terms of picking winning stocks.  

Today, I’ll show you how to combine those findings into a screen that pinpoints stocks meeting my “what’s working now” criteria. However, converting historical research into a profitable stock picking strategy is tricky business. There are no guarantees. Only time will tell if this strategy works.

Easy Screener

As usual, I’ll use the free and user friendly Finviz stock screener to demonstrate the process. Get there by selecting Screener from the Finviz home page (finviz.com). On Finviz, you use “filters” to define your selection rules. On the filters bar, click on “All” to see available filters. Then use the corresponding dropdown menu to pick values for filters that you want to use.

Start by selecting “USA” on the Country filter dropdown menu to limit your list to U.S.-based stocks. Eliminate this step if you want to see foreign stocks as well.

Valuation Matters

Next we’ll apply two valuation ratios, Forward P/E and PEG.

The Forward P/E (price to/earnings) ratio is the current share price divided by next year’s forecast earnings. Use its dropdown menu to specify “under 15.”

Next, specify “under 1” for PEG, which is the Forward P/E compared to forecast earnings growth.

My research found that adding these two valuation restrictions typically increases your gains in strong markets, but adding them doesn’t necessarily cut your losses in down markets. We’ll balance that out with our next filter.

Going Up?

We’ll to that by requiring that passing stocks must be trading above their 200-day moving averages (average closing price over the last 200 market days). While sticking with stocks trading above their 200-day MAs doesn’t necessarily boost returns in strong markets, I’ve found that doing so significantly cuts losses in down markets. Specify “Price above SMA” on the “200-Day Simple Moving Average” dropdown window.

Next, we’ll limit our list to low-beta stocks.

Low Beta

Beta measures the historical volatility of a stock compared to the S&P 500. High beta stocks (values above 1.0) typically outperform in strong markets, but produce bigger losses in weak markets. Conversely, low beta stocks underperform high beta stocks in strong markets, but limit losses in down markets. Savvy investors know that minimizing losses is the key to making money in the stock market. Thus, specify “under 1” for Beta. 

Be a Contrarian

Finally, based in my research that found that stocks rated “sell” by market analysts outperform “buy” rated stocks, use the Analyst Recommendation filter and specify “Hold or Worse.”

Results: Five Stocks

My screen turned up five stocks: Aflac (AFL), Alliance Holdings (AHGP), Assurant (AIZ), Fidelity & Guaranty Life (FGL), LGI Homes (LGIH), and Oaktree Capital (OAK).  Use this link to see which stocks the screen is turning up today.

I've found that stocks picked by this method are best held 6- to 12-months. As is the case for any screen, consider the results to be research candidates, not a buy list. The more you know about your stocks, the better your results.

Published 10/30/17

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