Looking for Out-of-Favor Stocks

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 |  Includes: APO, ARKR, ARLP, ATI, CLMT, CONN, DWSN, FTO, HPY, MIND, MTXX, NOOF, RES, RS, SJT, SPN, SWSIP, TBSI, TGE, WNR
by: Davy Bui

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 (NYSE:WNR) and Frontier Oil (NYSE:FTO) to service companies like Superior Well Services (SWSI) and Dawson Geophysical (NASDAQ:DWSN), half the screen comprised of the oil/gas industry. Additionally, other commodity companies like coal miner, Alliance Resource Partners (NYSE:ARP) and steel/aluminum producer, Reliance Steel (NYSE: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 (NYSE: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