For investors who are interested in purchasing individual stocks but are struggling to come up with viable ideas, I’ve run a screen for stocks using eight criteria that I think are important to investors nowadays and/or important to exposure in an equity portfolio.
In no particular order, the criteria and explanations for why I selected these specific criteria are as follows:
- Market capitalization greater than $5 billion – In an era of too-big-to-fail, start by looking at the bigger, more interconnected companies.
- Dividend yield of 2% to 4% - It appears that over the past year or two, investors have become obsessed with high-yielding dividend stocks. This obsession might have created an opportunity in lower-yielding equities. But less than 2% probably won’t cut it for an investor searching for income.
- Beta between 1 and 2 – After stuffing ourselves with utilities and “big pharma” in 2011, you might want to add a little bit more beta to the portfolio. Also, if you are going to take a 2% yield, you might want more beta to make up for lost income.
- Short interest as percentage of shares outstanding less than or equal to 3% - Some investors like to purchase highly shorted stocks. While I am sometimes tempted to do so for a trade, I’ve learned over the years that far too many times, the investors shorting a highly shorted stock have done their homework quite well and eventually end up being correct. Those aren’t stocks I would want to target for a long-term portfolio.
- Sector is not Financials - Despite the fact that we live in a too-big-to-fail world, until Europe fixes the problems its banks face, investors should be wary of all financial stocks worldwide. If you insist on having exposure to U.S. banks, consider the top of the capital structure of the too-big-to-fails.
- There must be an option chain - Having the ability to hedge a position and bring in additional income on top of the dividend is something quite nice to have available when needed.
- Interest coverage greater than ten - Although the market median for interest coverage is 3.3, if you’re interested in higher beta, lower yielding stocks, at least make sure the interest on the debt is well covered.
- Trading 20% or more below 52-week high - Let’s look at stocks that have all the aforementioned criteria and aren’t receiving a lot of love from investors.
When scanning for stocks that fit these eight criteria, the search returned 12 companies. Five of the companies have American Depositary Receipts (ADRs) on U.S. exchanges, and the other seven have everyday common stock. What follows is the list of those companies with ADRs meeting all the criteria outlined above:
BHP Billiton (BHP) is a diversified natural resources giant that operates in 25 countries across 20 commodities. Its twelve different businesses are Aluminium, Base Metals, Diamonds & Specialty Products, Energy Coal, Iron Ore, Manganese, Marketing, Metallurgical Coal, Minerals Explorations, Petroleum, Stainless Steel Materials, and Uranium. BHP is currently trading at $74.72, 28.56% off its 52-week high of 104.59, and well above its November 2008 low of $24.53.
The ABB Group (ABB) is a global power and automation technologies leader with offices in 87 countries. Its five business units include Power Products, Power Systems, Discrete Automation and Motion, Low Voltage Products, and Process Automation. ABB is currently trading at $19.77, 28.32% off its 52-week high of $27.58 and well above its November 2008 low of $9.11.
Rio Tinto (RIO), an international mining group, is one of the leading companies in the world at discovering, mining, and processing mineral resources. Its five main product groups are Aluminium, Copper, Diamonds & Minerals, Energy and Iron Ore, and Technology & Innovation and Exploration. RIO is currently trading at $52.98, 30.90% off its 52-week high of $76.67 and well above its December 2008 low of $14.80.
Sterlite Industries (SLT) is India’s largest non-ferrous metals and mining company. Its main businesses include Aluminum, Copper, Zinc & Lead, and Commercial Energy. SLT is currently trading at $7.45, 55.12% off its 52-week high of $16.60 and well above its October 2008 low of $3.12.
Honda Motor Co. (HMC) is a leading automobile maker and motorcycle manufacturer worldwide. Honda also manufactures and markets a range of other products including engines, lawn mowers, water pumps, and portable generators. In 2011, Honda had a global network of nearly 500 subsidiaries. HMC is currently trading at $32.61, 26.82% off its 52-week high of $44.56 and well above its December 2008 low of $17.35.
One final note: Keep in mind that depending on the country each of these companies is from, there may be a foreign dividend withholding tax on the dividend.
Disclaimer: I cannot make any guarantees that the data pulled by the screen is the most up-to-date data available, nor can I guarantee that the data referenced above is entirely accurate. The stock screener used inputs from third party vendors to compile the list of stocks mentioned above. The aforementioned list of stocks is meant to be an idea generator. If you are interested in any of these securities, please do your own due diligence and make sure it suits your needs.