Searching for the proverbial "diamond in the rough" investment is difficult, in large part because there are thousands of publicly traded possibilities. Using computerized screens to filter according to various criteria is a fine starting point for analysis, reducing the number of companies to a manageable number. From that point you can then study their annual reports, websites, industries, and SEC filings - especially the annual report Form 10-K, research reports, and other sources to make a final choice.
The Value Line Investment Survey provides an online searchable data base using several hundred criteria on their 1,700 stock universe, and it's a very useful screening tool. Unfortunately there are a number of excellent foreign stocks not followed by VLIS. However, for the universe they follow and update quarterly, it's very effective.
To develop a list of quality companies with potentially outstanding appreciation potential of at least 100% for further analysis, we set up the following criteria:
- Price appreciation expected of at least 100%;
- Financial Strength of A++, A+, or A [VLIS' three highest levels];
- Safety rank of 1, 2 or 3 (on a 1-to-5 scale);
- Timeliness rank of 1 or 2 (on a 1-to-5 scale); and,
- Dividend yield of at least 1%.
VLIS uses statistical analysis to develop a best-fit formula for each stock to predict a reasonable future value. For Kohl's (NYSE:KSS), for instance, the projection is based on 13 times projected cash flow per share. Kohl's currently sells for $49.84 per share. VLIS projects cash flow per share in 2014-2016 to be $9.80 so 13x equals $127.40 which they report as a range of $100-$135.
While not screening criteria so that we'd quickly have some additional information, we also asked for the annual total return, current yield, dividend growth rate, P/E ratio, projected sales growth, and the Net Income for the TTM. The screen using the five bullet-point criteria listed above gave us the following list of quality companies with 100% or more expected price appreciation:
|Projected 3-5 year Price Appreciation |
|Market Capitalization||Return on Common Equity|
|Halliburton (NYSE:HAL)||146%||$30.8 billion||17.3%|
|Rio Tinto (NYSE:RIO)||137%||$97.2||24.7%|
|Diamond Offshore (NYSE:DO)||122%||$7.8||24.7%|
|Teva Pharm (NYSE:TEVA)||117%||$37.1||18.8%|
|Wells Fargo (NYSE:WFC)||111%||$143.7||9.2%|
|Parker Hannifin (NYSE:PH)||110%||$11.5||12.7%|
|BHP Billiton (NYSE:BHP)||107%||$198.6||26.2%|
Each of these companies is a leader, the smallest being Diamond Offshore, with a $7.8 billion market cap. All are profitable and most have excellent ROEs. On an interesting note, only three - Kohl's, Intel, and Teva - have betas at or below the S&P 500, so overall these companies are more volatile than the market.
This kind of screen is a very useful starting point to narrow down the thousands of possible investments to a reasonable list which can then be more carefully researched. Will these 12 beat the market and double (or better) in the future?
Disclosure: I am long INTC.
Disclaimer: The author is a paying subscriber to VLIS, has no financial interest in VLIS and receives no compensation of any kind from VLIS.