Some prefer to trade value stocks where the calculated fair price is greater than the trading price. They take advantage of the price discrepancy and hope the stock or industry will come in favor again. Others prefer to trade high growth stocks such as William J. O’Neil and his CAN SLIM approach. But is there a middle ground where you can buy undervalued stocks that have the potential for growth?
Here is the criteria for finding some potential stocks :
- High EPS
The stocks will have at least $1.50 EPS. We want stocks with decent earnings without having an overly diluted float. We are not interested in merely high growth stocks that have not yet proved their earning potential.
- P/E < 8
The price to earnings will be less than 8 in our screening criteria. This is one way to find value based growth since PEG ratios are not terribly relevant in the value stock bin. The earnings represent 12.5% of the share price growth annually. All things being equal (which they are not), share price should grow 12.5% as earnings are re-invested into the company. This assumes dividends are not paid out.
- Return on Equity > 20%
The management will need to prove their efficiency with shareholder equity.
- Earnings Growth over Past 5 Years > 25%
- Price to Book Ratio < 1.5
We want to see the price fairly close to the net worth of the company for a value stock.
- P/S < 1
Although EPS can sometimes be presented in numerous formats to give the most rosy impression, revenue will indicate whether the increased earnings was based on solid revenue. The stock price will be less than the revenue per share.
The list of stocks that met these criteria?
Of course, there is much more to stock picking than these criteria. Next we need to perform due diligence with each stock to discover if these are truly strong value picks with growth potential or merely stocks that have fallen from grace on their way down.
Disclosure: No Positions