The goal of this article is to find superior stocks by analyzing companies outperforming their industry in a few key areas.
In theory, these superior fundamental stocks should be great price performers when tracked over a long period of time. In practice, we need to be careful that while focusing on a few key fundamentals we do not overlook the big picture. There were free drinks and great music being played while the Titanic sank.
To break down this screening idea I ran the following:
- Moderate Buy rating or better.
- Return on Equity at least 11% higher when compared to industry average.
- Net Profit Margin at least 13% higher when compared to industry average.
- EPS Growth at least 15% higher when compared to industry average.
In theory, these should be some top rated picks that are leaders in their industry. The following is what I found according to their exchange:
- Alpha & Omega Semiconductor (AOSL)
- Avago Technologies (AVGO)
- Bofi Holding (BOFI)
- Cirrus Logic (CRUS)
- Exide Technologies (XIDE)
- Flextronics International (FLEX)
- Globe Specialty Metals (GSM)
- Miller Petroleum (MILL)
- Psivida Ltd. (PSDV)
- Seracare Life Sci (SRLS)
- Synergetics USA (SURG)
Refining Based on Forward P/E, Revenue Growth, and Price to Sales
Are some of these picks undervalued when looking at forward P/E ratios (also read Nine Unloved Value Stocks)? Low forward P/Es under 10 are BOFI, FLEX is borderline, PSDV, and MILL is -58.3.
Some prefer to look at a long-term increase in revenue growth as a good source of increasing value that is sustainable. If you are an investor that focuses on sales growth over the past 5 years then you may be interested in MILL, PSDV, AOSL, and BOFI with annualized growth greater than 20%.
Low price to sales choices also outline which may have low valuations when comparing market value to overall sales. Some value investors follow this ratio closely looking for less than 1. AOSL, XIDE, FLEX, CPY, and SPA are all good choices.
As with every other scan I have ran, always look over your potential picks very carefully. Leaders with better than average fundamentals in these key areas might suffer in another such as book value. CPY has a long-term decline in share price and is now considering a takeover bid. Some stocks have little historical data to go on such as AOSL and AVGO.
So as always, when you screen for stocks that are better than the industry average, do your due diligence to see if they are pretty facades hiding skeletons or if they are truly worthy of your investment dollars.
Data screening was performed by Bing Finance.