Looking for Out-of-Favor Stocks

One of the perks of being a certified Seeking Alpha contributor is access to various research tools like Zacks.com. Zacks is an investment research service primarily oriented toward momentum and growth investing so their recommended stocks tend to be closer to 52-week highs than to the lows. Nevertheless, I find their in-depth company research reports to be more informative than those offered by Morningstar or S&P.

While Zacks prefers stocks with strong earnings and stock price momentum, I took the inverse approach, screening for stocks with bad Zacks rankings (1 equates to strong buy and 5 a strong sell) but strong business models to overcome any short-term hindrances. We're looking for princes disguised as toads so I added strong ROA and price-to-cash-flow requirements. Here is the specific criteria used:

• Zacks ranking >= 4
• ROA 5 year average >= 10%
• Price-to-OCF <= 5

Readers can view the results on this spreadsheet.

The twenty stocks resulting from the screen seemed to lean heavily toward the oil and gas sector. From refiners like Western Refining (WNR) and Frontier Oil (FTO) to service companies like Superior Well Services (SWSI) and Dawson Geophysical (DWSN), half the screen comprised of the oil/gas industry. Additionally, other commodity companies like coal miner, Alliance Resource Partners (ARP) and steel/aluminum producer, Reliance Steel (RS), also made it through the filter.

The handful of non-commodity stocks in the screen included CEC Entertainment (CEC), which operates the Chuck E. Cheese pizza chain, and Heartland Payment Systems (HPY), which processes bank card payments.

With the recent run-up in the stock market, investors are having to dig deep to find bargains. One may be lurking in this screen but more research is required to distinguish companies with temporary problems from those deserving of a low rating.

See Zacks Contrarian Stock Screen Spreadsheet.

Disclosure: none

Comments

[BullnBear:]

I’ve been a fan of WNR for quite sometime now and I’ve been watching FTO as well.

The refining business is getting knocked down at the moment but within that sector you will find key players that have great position and location. WNR fits that description for me with the company presence in the Southwest as well as the exposure to East coast crude via Yorktown.

I believe that WNR has been under accumulation and of course I can’t really prove that but I have been watching the trading action for quite some time now.

For disclosure purposes I’m long shares of WNR.

Sep 11 11:27 PM

[frie:]

I own refiners - WNR included, ouch! Continue
to search for justification.
Comments that stuck with me on how cheap these
companies are, and particularly with such sustainable
business models and huge moat to new competition.
1. There will be no more refineries.
2. Some older refineries will and have closed -
even better for the updated ones like Holly and
Frontier as business returns.
3. Stock prices are very cheap when considered on
a true value of the hard assets basis. Even if you could
build new refineries, these things are dirt cheap
compared with replacement costs.
Go, refiners!
Friepen

when demand

Sep 17 05:03 PM

[epeon:]

I have owned ARLP for some time. Granted, it has been out of favor and I have not made a lot of money. However, it has paid a steady 8% dividend and I have written covered calls against it. For example, I wrote a covered call at 40 for December. Between the covered calls and the divy I have managed to eak out a steady 12 to 14%. So, I will probably keep it and write another covered call in December. It will be at 40 and out a few months.

Nov 07 05:59 AM